Stays Pending Arbitration of Claims Made Either By or Against Non-Parties to Arbitration Agreement

Vol. 15 No. 3

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Parties to contracts with arbitration provisions frequently attempt to avoid arbitration by suing non-signatories, or in the name of non-signatories, and seeking damages seemingly directly or indirectly arising from the arbitration agreements.  Under such circumstances, defendants may be entitled as a right to compel arbitration, or simply stay the claims pending arbitration, pursuant to the Federal Arbitration Act stay provision, 9 U.S.C. 3.  Such mandatory stays were granted only sparingly in most federal circuits prior to Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630 n.4 (2009).  A survey of recent decisions by various circuits staying non-signatory claims, either pursuant to 9 U.S.C. 3. (Section I) or through exercise of courts’ “inherent discretion” (Section II) follows.  In addition, the requirements and implications of each type of stay, including appellate issues, are addressed (Section III).

I. MANDATORY STAYS PURSUANT TO 9 U.S.C. 3

The Federal Arbitration Act, 9 U.S.C. §1, et seq. (“FAA”), embodies a “liberal federal policy favoring arbitration agreements….” AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1749 (U.S. 2011).1  Section 3 of the FAA states in pertinent part:

§3. Stay of proceedings where issue therein referable to arbitration

"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court…shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement…."

Although the term “parties” in Section 3 is somewhat ambiguous, the Supreme Court has interpreted Section 3 as referring to parties to the litigation rather than parties to the contract.  Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630 n.4 (2009).  Thus “a litigant who is not a party to the relevant arbitration agreement may invoke Section 3 if the relevant state contract law allows him to enforce the agreement.”  Id. at 633. Prior to Carlisle, the decision whether to stay claims among non-arbitrating parties generally was considered discretionary, except perhaps in the Fifth and Seventh Circuits.2        

“‘Traditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through ‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel....’” Carlisle, 556 U.S. at 631.  Examples of claims by or against non-signatories that might be appropriately stayed pursuant to 9 U.S.C. 3, include the following:  third-party claims under an insurance policy requiring the insured to arbitrate claims, based on a finding that the third-party claimants are “third party beneficiaries” of the policy (see Todd v. Steamship Mut. Underwriting Ass'n (Bermuda) Ltd., 601 F.3d 329, 334 (5th Cir. 2010)); claims against a contractor by its subcontractor’s successors, assigns or sub-subcontractors whose agreements sufficiently incorporate obligations of the first-tier subcontract by reference (see Awuah v. Coverall North America, Inc., 703 F.3d 36, 43-44 (1st Cir. 2012); and claims by or against a parent company for damages arising out of its subsidiary’s contract containing an arbitration provision, based upon equitable estoppel, agency or alter ego theories (see Physician Consortium Services, LLC, 2011 WL 480013 (11th Cir. 2011), Board of Trustees of City of Delray Beach Police and Firefighters Retirement System v. Citigroup Global Markets, Inc., 622 F.3d 1335, 1342-1343 (11th Cir. 2010), and Burnham Enterprises v. Dacc Co. LTD, 2013 WL 68923 (M.D. AL. 2013)).

The doctrine of “equitable estoppel” would seem to accommodate a wide-range of colorable arguments for staying or compelling arbitration of claims by or against non-signatories.  Courts have “estopped” claimants from avoiding arbitration of non-signatory claims that “make reference to,” “presume the existence of,” or “arise out of and relate directly to” the written agreement requiring arbitration, or that are “inextricably intertwined with” claims against a signatory. See, e.g., Field System Machining, Inc. v. Vestas-American Wind Technology, Inc., 2013 WL 1943307, 4 (N.D. Ill. 2013); Escobal v. Celebration Cruise Operator, Inc., 482 Fed.Appx. 475, 476, 2012 WL 2947591, 1 (11th Cir. 2012).

Importantly, district courts apply the summary judgment standard in determining the issue of arbitrability, thus both the applicant and opponent of the stay should consider whether exhibits authenticated by affidavit may be necessary to establish or rebut potential disputed facts material to the arbitrability inquiry. Control Screening LLC v. Technological Application and Production Co. (Tecapro), HCMC–Vietnam, 687 F.3d 163, 167 (3d Cir.2012); Mariano v. Gharai, 2013 WL 6098236, 3 (D. D.C. 2013).

Although grounds for a mandatory stay of a given claim may not be readily apparent, devoting the time and effort to researching and formulating colorable arguments for a mandatory stay, and beseeching the court, in the alternative, to grant a discretionary stay may be worthwhile for reasons discussed in Section III.

II.  DISCRETIONARY STAYS

Absent a state law basis for bringing non-signatories within the FAA’s mandatory stay provision, the decision whether to grant a stay remains within the district courts’ inherent discretion to “control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.”  Landis v. North American Co., 299 U.S. 248, 254, 57 S.Ct. 163, 166 (1936).  Parties to the two cases need not be the same and issues need not be identical to empower a court to stay proceedings in one suit to abide proceedings in the other. Id. at 255.  “The applicant for a stay must make out a clear case of hardship or inequity in being required to go forward, if there is even a fair possibility that the stay for which he prays will work damage to someone else.… Considerations such as these, however, are counsels of moderation rather than limitations upon power.” Landis, 299 U.S. at 254. 

When the “connected or related case” is in arbitration, courts are more likely to grant a discretionary stay pending completion of the arbitration, than when the tribunal of the other case is another court, due to the “federal policy in favor of arbitration...”  See, e.g., Sam Reisfeld v. S. A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976) (claims involving non-signatories to arbitration agreement signed by their affiliate were properly stayed because they were “inherently inseparable from” the claims at issue in their affiliate’s arbitration, and arbitration would otherwise “be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.”).  A key factor courts consider is whether the non-signatory’s potential liability derives from the conduct or potential liability of a party or signatory, such that staying claims against the non-signatory likely would conserve judicial resources and minimize the possibility of inconsistent results. Id.; see also Petrik v. Reliant Pharmaceuticals, 2007 WL 3283170 (M.D. Fla. 2007), citing Klay v. All Defendants, 389 F.3d 1191, 1204 (11th Cir. 2004); Am. Heart Disease Prev. Found. v. Hughey, 106 F.3d 389, 1997 WL 42714 (4th Cir. 1997). 

Perhaps the most obvious type of claims warranting a discretionary stay (if not a mandatory stay pursuant to 9 U.S.C. 3) are Miller Act claims, which “federal courts routinely stay…pending arbitration to determine the contractor's liability…”  U.S. f/u/b/o First Call Mechanical v. Sundt Constr., Inc., 2007 WL 1655976, 3 (D. Ariz. 2007); see also U.S. f/u/b/o Milestone Tarant v. Federal Ins. Co., 672 F.Supp.2d 92, 102 n.5 (D. D.C. 2009) (“unless [general contractor] were to intervene in this suit, litigation of [subcontractor]’s claims under the subcontract would occur through [the surety].  Arbitration between [subcontractor] and [general contractor] therefore would be far more efficient.”); U.S. ex rel. James B. Donaghey, Inc. v. Dick Corp., 2010 WL 4666747, 3 (N.D. Fla. 2010) (“It was not the intention of Congress to extend or enlarge the liability of the surety ... beyond the contractual or quasi-contractual obligations of the contractor who remains primarily liable.’”); U.S. f/u/b/o Vining Corp. v. Carothers Const., Inc., 2010 WL 1931100 *4 (M.D. Ga 2010) (“If a subcontractor could avoid the arbitration requirement in a subcontract by suing only the surety, such a result would effectively render arbitration provisions meaningless.”); U.S. f/u/b/o v. Bencor-Petriford, 2007 WL 1725468, 3 (N.D. Ind. 2007) (subcontractor’s recovery rights against the sureties “necessarily depend on whether [contractor] breached its subcontract with [subcontractor]. “The liability of the sureties…is limited to the liability of the principal [which] will be determined by arbitration, and there is no reason to duplicate the determination here [and] risk inconsistent rulings.”); U.S. ex rel. Humbarger v. Law Co., Inc., 2002 WL 436772 at 3 (D. Kan. 2002); U.S. f/u/b/o Peake Const., LLC v. Crown Roofing Services, Inc., 2010 WL 1416673 (E.D. La. 2010) (Miller Act sureties “stand in the shoes of” the general contractor and are entitled to its affirmative defenses); U.S. ex rel. TGK Enterprises, Inc. v. Clayco, Inc., 2013 WL 5348464, 11 (E.D. N.C. 2013); U.S. ex rel. Tanner v. Daco Const., Inc., 38 F. Supp. 2d 1299, 1306 (N.D. Okla. 1999); U.S. f/u/b/o Tesar v. Turner Const. Co., 2009 WL 3626696 *4 (N.D. OH 2009) (staying sub-subcontractor’s Miller Act claims against contractor and surety pending sub-subcontractor’s arbitration with subcontractor).  Lee & Rua Co. v. Great American Ins. Co., 2008 WL 1868633, 2 (W.D. Wash. 2008).

Claimants opposing a request for discretionary stay pending arbitration often argue a stay will delay recovery of damages owed for an “immoderate” or “indefinite” duration, thereby causing financial hardship.  See AgGrow Oils, L.L. C. v. National Union Fire Ins. Co. of Pittsburgh, PA, 242 F.3d 777, 783 (8th Cir.2001) (“In a complex, multi-party dispute…issues such as the risk of inconsistent rulings, the extent to which parties will be bound by the arbitrators' decision, and the prejudice that may result from delays must be weighed in determining whether to grant a discretionary stay, and in fashioning the precise contours of any stay.”) Such arguments often are dismissed by courts as speculative absent a specific and compelling showing of hardship, particularly when arbitration has commenced or, better yet, a final arbitration hearing date has already been set. See, e.g., United States ex rel. MPA Constr. v. XL Specialty Ins. Co., 349 F.Supp.2d 934, 939 (D. Md. 2004) (“It is a somewhat peculiar stance to assert that delay will cause financial hardship while simultaneously requesting that the court allow full-blown litigation to proceed.  One of the primary reasons why federal law favors arbitration is to resolve cases more quickly and efficiently.”)

III.  APPEALABILITY OF ORDERS GRANTING OR REFUSING A STAY

Counsel for a defendant seeking to stay a suit pending completion of an arbitration to which the defendant is not party should caption the motion in the district court as one brought under 9 U.S.C. 3, assuming counsel can formulate colorable arguments for a mandatory stay.  See GEA Group AG v. Flex-N-Gate Corp., 2014 WL 97289, 3-4 (7th Cir. 2014), citing Carlisle, 556 U.S. at 631 (“All that matters for appealability…is that the appellant sought the stay on the authority of [9 U.S.C. 3], whether or not the stay was authorized by that section.”)

If a motion for stay captioned that way is denied, it will be immediately appealable pursuant to 9 USC 16(a)(1)(A).  Id.; see also Conrad v. Phone Directories Co., Inc., 585 F.3d 1376, 1385 (10th Cir. 2009) (“The first, simplest, and surest way to guarantee appellate jurisdiction under § 16(a) is to caption the motion in the district court as one brought under FAA § § 3 or 4. …  This simple rule should dispose of the vast majority of cases in this area, and those hoping to avail themselves of the immediate appeal provided for in the FAA would do well to follow it.”).  Notably, dicta in the Conrad decision states: “if the court suspects that the motion has been mis-captioned in an attempt to take advantage of § 16(a), it must look beyond the caption” to “determine whether it is plainly apparent from the four corners of the motion that the movant seeks only the relief provided for in the FAA, rather than any other judicially-provided remedy.”  Conrad, 585 F.3d at 1385.  Counsel should consider this admonition and potential implications for appealability, even if briefly, in deciding upon an alternative request for stay pursuant to the court’s inherent discretion.

Interlocutory orders of federal courts granting motions for stays, in contrast, are very rarely appealable. See 9 USC 16(b)(1) (expressly prohibiting appeals from interlocutory orders “granting a stay of any action under section 3 of this title,” except as otherwise provided in 28 U.S.C. 1292(b”);3   Miccosukee Tribe of Indians of Florida v. South Florida Water Management Dist., 559 F.3d 1191, 1194 (11th Cir. 2009) (with very limited exception, a discretionary stay order “is not a final decision for purposes of § 1291.”). Note, however, that appealability of state court orders granting or refusing stays pending arbitration pursuant to 9 USC 3 likely is controlled by applicable state rules of appellate procedure. See, e.g., Batton v Green, 801 SW2d 923 (Tex. App. 1990) (FAA did not preempt state's procedural law which did not allow an interlocutory appeal of an order denying a motion to stay the action pending arbitration proceedings, because state law did not interfere with liberal federal policy favoring arbitration. Wells v. Chevy Chase Bank, F.S.B., 768 A.2d 620 (2001) (General appeals statute, recognizing an order compelling arbitration to be a final and appealable judgment, is not preempted by the Federal Arbitration Act).

Endnotes

1. The FAA applies to any “contract evidencing a transaction involving commerce…” 9 U.S.C. 2.  The U.S. Supreme Court has interpreted this language as “signal[ing] the broadest permissible exercise of Congress’ Commerce Clause power.”  Citizens Bank v. Alafabco, 539 U.S. 52, 56 (2003).  Challenges to the FAA’s applicability to construction contracts are rare and would fail under most circumstances.

2. See Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 21, n. 23, 103 S.Ct. 927 (1983) (indicating by footnote that staying litigation among the non-arbitrating parties “may be advisable” but the “decision is one left to the district court…as a matter of discretion to control its dockets.”).  Waste Management v. Residuos Industriales Multiquim, 372 F.3d 339 (5th Cir. 2004); Hill v. G E Power Systems, Inc., 282 F.3d 343, 347–348 (5th Cir. 2002) (“A suit against a nonsignatory that is based upon the same operative facts and is inherently inseparable from the claims against a signatory will always contain ‘issue[s] referable to arbitration under an agreement in writing,’” as is required for a stay under 9 U.S.C. 3; “[p]ermitting the action to proceed without a stay as to the [non-signatory] defendant would undermine the arbitration between the plaintiff and the [signatory] defendant, “thereby thwarting the federal policy in favor of arbitration.”); Kroll v. Doctor's Associates, Inc., 3 F.3d 1167, 1171 (7th Cir.1993) (“section three of the Federal Arbitration Act ‘plainly requires that a district court stay litigation where issues presented in the litigation are the subject of an arbitration agreement.’ … a stay must be granted, even in favor of persons that are not party to the agreement containing the arbitration clause, if the litigation is an attempt ‘to evade the agreed-upon resolution of their disputes in the arbitration forum by introducing the identical controversy against a party who is ultimately liable for the arbitrating party's acts.’”). 

3. Generally, stay orders direct clerks of court to administratively close the cases pending the outcome of arbitration, rather than dismissing the cases.  Such orders are almost always interlocutory. See Kaplan Industry, Inc. v. Oaktree Capital Management, LP., 2011 WL 5599380, 1 (11th Cir. 2011) (granting appellee’s motion to dismiss appeal, for lack of jurisdiction, of an order granting appellee’s motion for a stay pending the parties' arbitration proceedings, pursuant 9 U.S.C. § 3, because district court merely administratively closed the case without dismissing it and did not certify the appeal under 28 U.S.C. §1292(b)); Cf. Green Tree Financial, 531 U.S. at 87 n. 2 (“Had the District Court entered a stay instead of a dismissal in this case, that order would not be appealable [per 9 U.S.C. § 16(b)(1)]”).  


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