An environmental contamination case brought by 35 children living near a smelting facility in Peru can move forward despite a related foreign arbitration over indemnity, the U.S. Court of Appeals for the Eighth Circuit has ruled.

On November 13, a unanimous panel affirmed a denial of the defendants’ motions for a mandatory or discretionary stay of the case during the arbitration. The court held that the case “relates to” arbitration, but is not “referable to” arbitration and thus a mandatory stay is not appropriate.

In August 2008, the plaintiffs filed several suits against owners and operators of the smelting facility, including Doe Run Resources Corp.; U.S. investment company The Renco Group Inc.; related companies; and executives at the companies. The cases were brought in St. Louis City Circuit Court.

In 2010, Renco filed a notice to arbitrate with Peru, seeking indemnification for third-party actions; a state-owned company previously operated the facility. In January 2011, Renco removed all 11 cases to federal court. In June 2011, the district court denied the children’s motion to remand the cases.

In Renco’s motion to stay the case pending the arbitration, the company claimed that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards called for a mandatory stay. The convention gives federal courts jurisdiction over cases related to international arbitrations covered by it.

In December 2011 Chief Judge Catherine Perry of the Eastern District of Missouri ruled that a mandatory stay under the convention was not required because the claims did not relate to Renco’s Stock Transfer Agreement with Peru’s state-owned entity, so they were not referable to arbitration. The defendants appealed.

Judge Duane Benton authored the opinion, in Reid v. Doe Run Resources Corp., joined by Judge Michael Melloy and Judge Kristine Gerhard Baker of the Eastern District of Arkansas, who heard the case by designation.

Benton first addressed the removal issue, finding removal to have been proper. He relied on Fifth Circuit and Ninth Circuit rulings to find that the right to remove cases to federal court under the convention “is ‘substantially broader’ than that in the general removal statute. … Joining the Fifth and Ninth Circuits, this court holds that a case may be removed under [a section of the U.S. Code concerning such conventions] if the arbitration could conceivably affect the outcome of the case.”

Addressing the motion to stay the case, Benton first noted that the arbitration’s outcome could affect disputes in the case, including whether the pollution happened during the defendants’ ownership of the facility, whether it caused the children’s injuries and whether Peru is a party in the lawsuit: “While the children contend that the cases are completely independent and unrelated, either party could conceivably inject portions of the arbitration into this case. For example, if the arbitration panel found Renco completely liable for all environmental damage and injuries, the children could conceivably introduce that finding.”

Benton then agreed with the plaintiffs that the Eighth Circuit does not have jurisdiction over the discretionary-stay claim, which is not a final judgment, or an interlocutory order subject to appeal. He wrote that, for the Eighth Circuit to have jurisdiction over a pendant claim “the resolution of the direct claim must necessarily resolve the pendent claim … Here, the resolution of the mandatory-stay claim does not necessarily resolve the discretionary-stay claim.”

Benton then determined that the district court properly denied a mandatory stay because the issues in the case are not referable to arbitration. He wrote that a trier in this case “will decide only the theories pled in the complaint. … The factual allegation underlying this case is that the defendants negligently operated the facility. The factual allegation underlying the arbitration is breach of contract. … Courts frequently address indemnification in separate proceedings from those determining liability.” Even if Peru must step in and defend the claims, “that fact … does not preclude the children from continuing the case.”

The plaintiffs’ lawyer, Michael Wolff, counsel to Schlichter, Bogard & Denton in St. Louis, said his clients are pleased that the Eighth Circuit agreed the case is not subject to a stay pending the arbitration between the defendants and the government of Peru. But the plaintiffs are also a “bit dismayed” by the court’s expansive application of the jurisdictional statute, he said.

Although the ruling that the convention offers a broad right to remove cases to federal court could be a major issue in other cases, “in our case, we’re less worried about that. We’re mostly pleased just to be able to finally pursue our claims after all of these years of delays in the court,” Wolff said.

James Bennett of Dowd Bennett in St. Louis, who argued for the appellants, did not respond to a request for comment. Lewis, Rice & Fingersh, also of Saint Louis, also represented Doe Run. Williams Venker & Sanders of St. Louis represented D.R. Acquisition, another defendant.