On July 7, 2016, the US Court of Appeals for the Fifth Circuit held in Rainier DSC 1, LLC v. Rainier Capital Management, LP that the district court did not err in deciding not to stay litigation against defendants who were not signatories to the relevant arbitration agreement ( (5th Cir. July 7, 2016)).

The plaintiffs sued several Rainier entities and a number of other defendants, alleging fraud, breach of contract, and violations of federal securities law. The Rainier defendants, who were signatories to an arbitration agreement, moved to compel arbitration, and the district court granted the motion. The district court permitted the litigation to proceed against other defendants who were not signatories to the arbitration agreement and eventually dismissed plaintiffs' claims against some non-signatory defendants.

The plaintiffs filed their first appeal, asserting that the district court should have stayed litigation against all defendants pending the arbitration proceedings and asking the Fifth Circuit to vacate all orders entered after the Rainer defendants filed their motion to compel arbitration. While the plaintiffs' initial appeal was pending, the district court granted summary judgment for some non-signatory defendants.

The Fifth Circuit dismissed the plaintiffs' initial appeal because the district court had not entered an order refusing a stay. Plaintiffs then filed a second appeal challenging the dismissal and summary judgment orders and arguing that those orders (and any others issued by the district court after the motion to compel arbitration) should be vacated because the district court was required to stay the case. Over the defendants' objection, the Fifth Circuit found that it had jurisdiction over the second appeal because the plaintiffs were now appealing from multiple final judgments.

Section 3 of the Federal Arbitration Act (FAA), which governs stays of litigation pending arbitration, generally applies to parties (signatories) to an agreement containing an arbitration clause. Section 3 can also apply to non-signatories if:

The Fifth Circuit found that the plaintiffs failed to demonstrate that the claims against the non-signatory defendants met all of these requirements. The plaintiffs' appellate brief did not discuss the distinction between signatories and non-signatories and did not argue that the above factors were met. Rather, the plaintiffs only addressed the requirements for a stay of claims against non-signatories in their reply brief, so the argument was not properly before the Fifth Circuit. Consequently, the Fifth Circuit held that the district court did not err in permitting the litigation to proceed against the non-signatory defendants.

For additional information about the rules governing arbitration, see US Arbitration Toolkit.