Originally published May 4, 2009
Keywords: Arthur Andersen, Carlisle, Federal Arbitration Act, FAA, stay of litigation, investors, tax advice, investment-management agreements, Bricolage, investment strategy, tax shelter, bankruptcy, Supreme Court
Today the Supreme Court issued two decisions, described below, of interest to the business community.
Arthur Andersen LLP v. Carlisle, No. 08-146 (previously discussed in the November 10, 2008 Docket Report).
Section 3 of the Federal Arbitration Act (FAA or Act) provides for a stay of litigation in any action that is "referable to arbitration under an agreement in writing." 9 U.S.C. § 3. The Act further provides that "an appeal may be taken from . . . an order . . . refusing a stay of any action" under that provision. 9 U.S.C. § 16(a)(1)(A). Today, in Arthur Andersen LLP v. Carlisle, No. 08-146, the Supreme Court held (1) that a court of appeals has jurisdiction under Section 16(a) to review a denial of a stay requested by a litigant not a party to the arbitration agreement and (2) that such a litigant is entitled to a stay under Section 3 if the relevant state contract law allows the litigant to enforce the agreement.
In the case before the Court, a number of investors sought tax advice from the accounting firm of Arthur Andersen, which introduced them to the investment firm of Bricolage Capital, LLC, which in turn referred them to the law firm of Curtis, Mallet-Prevost, Colt & Mosle, LLP for legal advice. Limited-liability corporations created by the investors entered into investment-management agreements with Bricolage. Each agreement specified that "[a]ny controversy arising out of or relating to this Agreement . . . shall be settled by arbitration." Slip op. 1-2. When the investment strategy carried out by Bricolage was deemed an illegal tax shelter by the Internal Revenue Service, the investors filed suit against Bricolage, Arthur Andersen, Curtis Mallet, and others. Arthur Andersen and Curtis Mallet moved for a stay under Section 3 of the FAA, which the district court denied. (Bricolage had filed for bankruptcy in the interim.) Arthur Andersen and Curtis Mallet then filed an interlocutory appeal of that denial, which the Sixth Circuit dismissed for lack of jurisdiction, concluding that nonparties to a written arbitration agreement are ineligible for relief under Section 3 of the FAA.
In an opinion by Justice Scalia, a six-Justice majority of the Supreme Court reversed. The Court held that the only consideration relevant to the jurisdictional question is whether the interlocutory appeal is in fact an appeal of "an order . . . refusing a stay of any action under section 3" and that the language of the FAA provision "unambiguously makes the underlying merits irrelevant." Slip op. 4. Because the appeal indisputably concerned such an order, the Court concluded, jurisdiction existed regardless of the merits of the underlying motion for a stay. The Court went on to reject the Sixth Circuit's conclusion that a nonsignatory could not seek to stay litigation and compel arbitration, confirming the long-established principle that Section 2 of the FAA places agreements to arbitrate on an equal footing with other types of contracts. The Court thus held that, to the extent that the relevant body of state contract law—such as under the equitable-estoppel principles invoked by Arthur Anderson and Curtis Mallet—allows an agreement to be enforced by nonparties to the agreement, those nonparties must be eligible for relief under Section 3 of the FAA in order to enforce it.
In a dissenting opinion joined by Chief Justice Roberts and Justice Stevens, Justice Souter suggested that the FAA's grant of a right to an immediate appeal of a denial of a motion for a stay "under section 3" should be understood as more than "merely a labeling requirement," particularly in light of the presumption against interlocutory, "piecemeal" appeals. Slip op. 1 (Souter, J., dissenting). Instead, the dissent argued, Section 3 itself should be understood to "offer[] a stay only to signatories of an arbitration agreement," and Congress should not be assumed to have intended "to grant the right to appeal a § 3 denial to anyone as peripheral as a nonsignatory." Id. at 2.
The decision in Arthur Andersen is significant because it resolves a mature circuit split over whether nonsignatories can compel arbitration under Section 3 of the FAA and appeal from the denial of a motion to compel arbitration. The decision ensures that third parties seeking to compel arbitration under a contract have a procedural avenue for doing so.
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Burlington Northern & Santa Fe Railway Co. v. United States, No. 07-1601 (consolidated with Shell Oil Co. v. United States, No. 07-1607) (previously discussed in the March 17, 2008 Docket Report).
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. §§ 9601-9675, allows state and federal authorities to clean up contaminated areas and later seek to recover the clean-up costs from those whom the statute makes potentially liable for the contamination. Id. § 9607(a). In addition to the owners and operators of a contaminated property, any person who "arranged" for disposal or treatment of the hazardous substances is potentially liable. Id. § 9607(a)(3). Courts have long held, moreover, that CERCLA imposes joint and several liability on all potentially liable parties, while recognizing that apportionment of liability is appropriate in at least some cases. Today, in Burlington Northern & Santa Fe Railway Co. v. United States, No. 07-1601, the Supreme Court held (1) that arranger liability requires "intentional steps to dispose of a hazardous substance," slip op. 11, and (2) that apportionment is proper if "there is a reasonable basis for determining the contribution of each cause to a single harm," id. at 14 (quoting Restatement (Second) of Torts § 433A(1)(b)).
In the case before the Court, two railroads owned part of the land on which a facility for storing and selling agricultural chemicals was located. After the operator of the facility—Brown & Bryant (B&B)—became insolvent, the Environmental Protection Agency (EPA) and the State of California sought to impose liability on the railroads for clean-up costs at the site. They also sought to impose liability on Shell Oil Company (Shell), which had sold some of the contaminants to B&B and shipped them by common carrier. In the decision below, the Ninth Circuit held that both sets of defendants were liable, reasoning that "an entity can be an arranger even if it did not intend to dispose of the product." 520 F.3d 918, 949. The court of appeals also held that, although liability may be apportioned in accordance with common-law principles, apportionment was not justified in this case, because there was no "reasonable basis for divisibility." Id. In an opinion by Justice Stevens, an eight-Justice majority of the Supreme Court reversed the Ninth Circuit on both points.
With respect to arranger liability, the Court gave "arranger" its ordinary meaning, which implies some "action directed to a specific purpose." Slip op. 10. Thus, even though Shell knew that B&B was spilling some of the chemicals, the Court found that "knowledge alone is insufficient to prove that an entity 'planned for' the disposal, particularly when the disposal occurs as a peripheral result of the legitimate sale of an unused, useful product." Id. at 12. Instead, the Court explained, a chemical supplier like Shell would be liable as an arranger only if it entered into a sale "with the intention that at least a portion of the product be disposed of during the transfer process." Id.
With respect to apportionment of liability, the Court confirmed that apportionment is proper if there is a "reasonable basis" for determining each party's contribution to the harm. Slip op. 13-14. The Court also found that there was a "reasonable basis" to support the district court's apportionment of 9% of the clean-up costs to the railroads in this case. The Court upheld the district court's reliance on a variety of factors in assessing apportionment, including percentages of land area (the railroads owned only 19% of the overall site), time of ownership (the railroads owned their parcels for only 45% of the time that B&B operated at the site), and the volumes and types of hazardous substances used and released (fewer spills occurred on the railroad parcel, and of those spills, not all were carried across the parcel to the rest of the site). As a consequence, the Court reversed the Ninth Circuit's conclusion that the railroads were subject to joint and several liability for the entire clean-up.
Justice Ginsburg filed a dissenting opinion. She would have held that Shell was an "arranger" and remanded the case to the district court for further proceedings on apportionment.
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