The U.S. Court of Appeals for the Fifth Circuit held last week that nonsignatories plaintiffs were bound by the arbitration agreement between decedent and his employer. In Graves v. BP American Inc., No. 08-40575 (5th Cir. May 6, 2009), plaintiffs are the surviving relatives of an employee of defendant JV Industrial Companies, who died in a work-related accident at a BP facility in Texas. The plaintiffs sued under the Texas wrongful death statute and the Texas survival statute. Defendants moved to compel arbitration pursuant to the arbitration clause in decedent’s employment contract. The district court granted the motion with respect to the survival claims, because it found those claims to be “wholly derivative of the decedent’s rights.” On the other hand, the court refused to compel arbitration of the wrongful death claims, as it found them to be “personal to the plaintiffs.” Defendants appealed. The issue before the Fifth Circuit was whether nonsignatories suing a decedent’s employer under the Texas wrongful death statute are bound by an arbitration agreement between the employer and the decedent. The court first considered whether state or federal law choice of law applied, by setting out the two-prong analysis presented by a motion to compel arbitration: Validity: whether there is a valid agreement to arbitrate. Here, the court answered that it applies state law principles that govern contract formation to resolve this question. Scope: whether the dispute is within the scope of the arbitration agreement. The court pointed out that this question is resolved by applying the federal substantive law of arbitrability. Next, the court noted that the present issue falls somewhere between validity and scope and added that case law is inconsistent as to the choice of law. However, the Fifth Circuit reasoned that it was not required to decide the applicable choice of law because under both, federal and state law, the outcome was the same. Under Texas law, citing In re Labbat, the court determined that nonsignatories are bound by the agreement because they “stand in the decedent’s legal shoes.” Similarly, applying federal law, the court stated that the “direct benefits” version of estoppel applies. Accordingly, “a nonsignatory cannot sue under an agreement while at the same time avoiding its arbitration clause.” Then, the court found that the statutory wrongful death action was, at least in part, premised on the decedent’s employment agreement. The Fifth Circuit reversed, holding that the plaintiffs were bound by the arbitration agreement made by the decedent. The most recent U.S. Supreme Court case on this issue, Arthur Andersen LLP v. Carlisle, (blogged here) should not change the result of the present case, because there, the Court held that whether a nonsignatory should be compelled to arbitrate is governed by applying state law. Technorati Tags: arbitration, ADR, law, Fifth Circuit, Nonsignatories

Mark A. Shank and John L. Turner from Gruber Hurst, Johansen & Hail, LLP wrote a timely article about arbitration, published this month by the Texas Bar Journal. The authors do an excellent job at explaining the virtues of arbitration (speed, informality, and low cost) and at the same time, address the latest challenges to mandatory arbitration by legislation introduced in Congress and the Texas Legislature. If you missed the article, here is the full text: The Future of Arbitration. Technorati tags: arbitration, ADR, law, Arbitration Fairness Act of 2009, Arbitration Fairness Day

Last week, the U.S. Supreme Court decided Arthur Andersen LLP v. Carlisle, No. 08–146, 2009 WL 1174853 (May 4, 2009). Justice Scalia delivered the majority opinion, joined by Justices Kennedy, Thomas, Ginsburg, Breyer, and Alito. Justice Souter filed a dissenting opinion, in which Chief Justice Roberts and Justice Stevens joined. The Court decided the following issues: Whether appellate courts have jurisdiction under Section 16(a) of the FAA to review denials of stays of litigation requested by nonparties to the arbitration agreement. Whether Section 3 of the FAA can ever mandate a stay of litigation by nonparties to the arbitration agreement. The Court concluded that Section 16(a) with “clear and unambiguous terms” expressly authorizes interlocutory appeals of motions denying Section 3 stays. Stressing that “[t]he jurisdictional statute here unambiguously makes the underlying merits irrelevant,” the Court rejected that this interpretation will produce frivolous interlocutory appeals. Next, the Court explained that Section 2 of the FAA makes arbitration agreements “valid, irrevocable, and enforceable, ” requiring courts “to place [arbitration] agreements upon the same footing as other contracts.” Then, Section 3 allows enforcement of Section 2, by requiring the courts to stay litigation, “on application of one of the parties” if the issue is “referable to arbitration under an agreement in writing.” When interpreting the phrase “one of the parties,” the Court clarified in footnote 4, that the word “parties” refers to parties to the litigation, and not to the parties to the contract. Then, the Court reasoned that Section 3 does not restrict the enforceability of Section 2. As a result, state law should be applied to determine which contracts are binding under Section 2 and enforceable under Section 3. The Court added that because state law allows contracts to be enforced by or against nonparties through different theories (assumption, piercing the veil, alter ego, incorporation by reference, third-party beneficiaries, waiver and estoppel), then nonparties may invoke Section 3. Finally, the Court held that appellate federal courts have jurisdiction to review the denial of a request for a Section 3 stay and that a litigant who was not a party to the arbitration agreement may invoke Section 3 if the relevant state contract law allows the nonparty to enforce the agreement. Technorati Tags: arbitration, ADR, law, U.S. Supreme Court, Arthur Andersen v. Carlisle

The American Arbitration Association recently introduced Non-Binding Resolution Services (arbitration and mediation) for disputes between businesses & consumers and employers & employees. Technorati Tags: arbitration, ADR, law, mediation, non-binding arbitration, consumer arbitration, employee arbitration