Federal Jurisdiction Limited When Confirming or Setting Aside Domestic Arbitration Awards
- Federal jurisdiction may not be available for petitions to confirm or vacate a domestic arbitration award when the only basis for jurisdiction is that the underlying dispute involves a federal question.
- The U.S. Supreme Court held that the "look through" approach is limited to petitions under Section 4 and refused extending it to petitions under Sections 9 and 10 of the Federal Arbitration Act (FAA).
In a recent decision involving arbitration, the U.S. Supreme Court held that federal courts do not have subject-matter jurisdiction to confirm or vacate a domestic arbitration award under Sections 9 and 10 of the Federal Arbitration Act (FAA) when the only basis for jurisdiction is that the underlying dispute involves a federal question. In so doing, the court eschewed extending the "look through" provision of Section 4 of the FAA, which allows a court to look at the subject matter of the underlying dispute when determining whether it has jurisdiction to hear a motion to compel arbitration, to a motion to confirm or vacate an award. The case is Denise A. Badgerow, v. Greg Walters, et al., No. 20–1143, 2022 WL 959675 (U.S. Mar. 31, 2022).
Denise Badgerow, an associate financial advisor with a Louisiana financial service company, initiated a Financial Industry Regulatory Authority (FINRA) arbitration proceeding against the three principals of the corporation after her termination. Badgerow sought damages for tortious interference of contract and for violation of Louisiana's whistleblower law. The FINRA panel dismissed all of her claims with prejudice.
Badgerow then filed a petition in Louisiana state court to vacate the arbitration award. The defendants removed the action to federal court, and Badgerow filed a motion to remand, asserting that the federal court lacked subject-matter jurisdiction over the petition to vacate. The district court held that it had subject-matter jurisdiction over the petition to vacate, denied remand and denied vacatur of the FINRA arbitration award. The U.S. Court of Appeals for the Fifth Circuit affirmed, and Badgerow petitioned for a writ of certiorari before the Supreme Court.
The "Look Through" Approach
The issue before the Supreme Court was whether the district court had jurisdiction over the petition to confirm or vacate the FINRA arbitration award because the parties' underlying substantive dispute would have fallen within the federal court's jurisdiction, or conversely, whether the federal court was prohibited from "looking through" to the underlying dispute to establish federal subject-matter jurisdiction over a petition to confirm or vacate an arbitration award under Sections 9 and 10 of the FAA.
The controversy arose because, in an earlier decision, the Supreme Court approved the "look through" approach in the context of FAA Section 4 and held that, in determining whether federal subject-matter jurisdiction exists for purposes of a motion to compel arbitration, a federal court may "look through" the petition to compel arbitration to the underlying dispute between the parties. See Vaden v. Discover Bank, 556 U.S. 44, 50 (2009). Vaden, though, is based on language unique to Section 4 of the FAA, which provides that it is proper to bring a motion to compel to any federal district court that, "save for [the arbitration] agreement, would have jurisdiction [over] a suit arising out of the controversy between the parties." The Supreme Court found this language allows district courts to "look through" the Section 4 petition and base its jurisdiction on the substance of the underlying dispute.
In contrast, Badgerow considered Sections 9 and 10 of the FAA. The Supreme Court noted that these sections "contain none of the statutory language on which Vaden relied." It declined to "redline the FAA, importing Section 4's consequential language into provisions containing nothing like it" and noted that "Congress could have replicated Section 4's look-through instruction in Sections 9 and 10," or it "could have drafted a global look-through provision, applying th[at] approach throughout the FAA. But Congress did neither." The Supreme Court refused to "pull the look-through jurisdiction out of thin air" and "find without textual support, that federal courts may use th[at] method to resolve … Section 9 and 10 applications." Absent an independent basis for federal court jurisdiction (e.g. diversity of citizenship), the court found there was no basis for federal court jurisdiction.
Impact of the Decision
Importantly, the court's decision in Badgerow does not apply in cases where the underlying arbitration is subject to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). This is because the New York Convention independently establishes a federal district court's subject-matter jurisdiction over petitions to confirm or vacate an award where the award falls under the Convention – i.e., foreign awards or awards rendered in the United States that have an international component (see Bergesen v. Joseph Muller Corp., 710 F.2d 928, 932 (2d Cir. 1983); Zhang v. Dentons U.S. LLP, 2021 WL 2392169, at *3 (C.D. Cal. June 11, 2021)). In contrast, the FAA does not provide an independent basis for federal subject-matter jurisdiction over petitions to confirm or vacate domestic arbitration awards. Thus, absent diversity jurisdiction (28 U.S.C. §1332(a)), a petitioner must show federal question jurisdiction under 28 U.S.C. § 1331 in order to bring the petition in federal court.
The Supreme Court's decision resolves a circuit split as to the circumstances in which a federal court may exercise federal question jurisdiction over applications to confirm, vacate or modify arbitral awards under Sections 9 through 11 of the FAA. The U.S. Courts of Appeals for the Third and Seventh Circuits had held that the "look through" jurisdiction analysis did not apply to such petitions. See Magruder v. Fid. Brokerage Servs. LLC, 818 F.3d 285, 288 (7th Cir. 2016); Goldman v. Citigroup Global Mkts., Inc., 834 F.3d 242, 255 (3d Cir. 2016). The U.S. Courts of Appeals for the First, Second, Fourth and Fifth Circuits, however, had held that the "look through" approach did apply to petitions under Sections 9 through 11 of the FAA. See Quezada v. Bechtel OG & C Constr. Servs., Inc., 946 F.3d 837, 843 (5th Cir. 2020); McCormick v. Am. Online, Inc., 909 F.3d 677, 682 (4th Cir. 2018); Ortiz-Espinosa v. BBVA Sec. of Puerto Rico, Inc., 852 F.3d 36, 47 (1st Cir. 2017); Doscher v. Sea Port Grp. Sec. LLC, 832 F.3d 372, 382 (2d Cir. 2016).
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