April 08, 2022
SCOTUS favors strict textual construction over consistency when it comes to federal jurisdiction in confirming or vacating arbitration awards.
Last week, the United States Supreme Court resolved a six-year-old split in the Courts of Appeals as to whether—in considering a petition to vacate or confirm an arbitration award under section 9 or 10 of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (the FAA)—a federal court may “look through” the petition and award to see if the dispute underlying the arbitration would support jurisdiction in federal court. The Supreme Court answered this technical jurisdictional question with a firm “no.” It based its “no” primarily on the absence in Sections 9 and 10 of the FAA of “distinctive language” found elsewhere in that statute, see 9 U.S.C. § 4, asking whether, “save for” the arbitration agreement itself, a federal court would have had jurisdiction over the underlying dispute. While the Court’s decision is relatively straightforward, its consequences may be somewhat more complex.
The Petitioner in the Supreme Court, Denise Badgerow, commenced an arbitration against her former employer and three of its owners or principals. In the arbitration itself, she alleged unlawful termination under both federal and state law. She lost.
Rather than accept her loss, however, Petitioner sued in Louisiana state court to vacate the arbitration award on grounds of fraud in the arbitration. The Respondents (the winners of the arbitration) removed the case to federal court and asked it instead to confirm the award. Petitioner replied by moving to remand the case to state court.
More than a decade ago, in Vaden v. Discover Bank, the Supreme Court held that a lower court could “look through” a request to compel arbitration to see if the underlying dispute would (but for the parties’ arbitration clause) have supported federal jurisdiction. In Badgerow, the District Court considering Petitioner’s request to vacate the award against her used this theory to “look through” the underlying arbitration. It found that the arbitration had included a federal claim and concluded that it could therefore exercise jurisdiction over applications to confirm or vacate the arbitration award.
In reaching this result, the District Court acknowledged that “Vaden’s ‘reasoning was grounded on specific text’ in Section 4 [of the FAA] that Sections 9 and 10 of that statute ‘do not contain.’” But to be “consistent,” it held that the same reasoning should apply to petitions to vacate or confirm as to petitions to compel arbitration in the first place.
This did not help Petitioner much as a practical matter. After deciding that it had jurisdiction, the District Court rejected her claims of fraud in the arbitration and confirmed the award against her.
Appealing to the United States Court of Appeals for the Fifth Circuit did not help her, either. It affirmed the District Court’s decision. But she persevered and sought review in the Supreme Court. And this time, she won.
After granting certiorari to resolve the circuit split on the jurisdictional issue, the Supreme Court reversed on that issue, eight to one, in an opinion by Justice Kagan. In effect, the decision requires the case to return to state court.
Justice Kagan began by reaffirming that the FAA does not itself create federal jurisdiction. Any case brought to a federal court under the FAA must have an “’independent jurisdictional basis.’” Otherwise, the case belongs in state court.
Justice Kagan then explained why Petitioner could not show any such “independent jurisdictional basis.” Petitioner and Respondents were all citizens of the same state, so there could not be diversity jurisdiction under 28 U.S.C. § 1332. The requests below to vacate or confirm the arbitration award asserted on their face no federal question, so they did not establish jurisdiction under 28 U.S.C. § 1331. The arbitration award itself did not involve a federal question because an arbitration “award is no more than a contractual resolution of the parties’ dispute—a way of settling legal claims.” According to Justice Kagan, “quarrels about legal settlements—even settlements of federal claims—typically involve only state law, like disagreements about other contracts.” And here, only Petitioner’s claim in the arbitration, not the resolution of that claim in an award, had any federal content.
Third, Justice Kagan examined whether, despite this lack of any independent federal jurisdictional basis in the efforts to confirm or vacate the award (or in the award itself), the federal claim embedded in the arbitration would be enough to support federal jurisdiction. Applying a strict textual analysis, the answer was “no.” While the Court had approved of such a “look-through approach for a Section 4 petition” to compel arbitration, this depended on “that section’s express language,” which provided that a “United States district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties” could hear a request to compel those parties to arbitrate.
In contrast to Section 4, Sections 9 and 10 of the FAA “contain none of the statutory language on which Vaden relied. Most notably, those provisions do not have Section 4’s ‘save for’ clause.” In effect following the trend of textualism currently in favor among several of the Justices, Justice Kagan therefore concluded that “under ordinary principles of statutory construction, the look-through method for assessing jurisdiction should not apply.”
After this analysis, Justice Kagan disposed (also on textual bases) of Respondents’ arguments for a more flexible approach. And she rejected the similar arguments of Justice Breyer in dissent for much the same reason, noting that “the (nigh-inevitable) connection among a statute’s diverse provisions does not give a court carte blanche to move rules or concepts from any one section to any or all others. For the reasons already stated, we cannot read this non-uniform statute—setting out a jurisdictional rule in one section by conspicuously omitting it in all others—as though it applied a single rule throughout.”
Nor was Justice Kagan swayed by any concerns that the Court’s decision would “give state courts a significant role in implementing the FAA.” Instead, she noted that “enforcement” of the FAA is already “left in large part to the states.”
It would be easy to categorize the decision in Badgerow as a technical one primarily of interest to law professors and other aficionados of jurisdictional theory. But, in fact, it has some very practical consequences.
First, by moving more cases to state court, Badgerow will likely make outcomes less predictable. This is because some state courts have shown a penchant for ignoring the Supreme Court’s broad preemptive view of the FAA.
Second, Badgerow increases the need to pay attention to residual venue clauses. Such clauses typically make provision for state and federal courts in a particular venue to handle matters not covered by an arbitration clause. Organizations should review existing clauses of this kind to make sure they are adequate. They also should not ignore the importance of such clauses in future drafting—because now such clauses may more often determine which state courts hear requests to vacate or confirm an arbitration award.
Finally, Badgerow may encourage drafters seeking additional access to federal courts for confirmation or vacatur to become creative with their arbitration clauses. For example, it would be possible to draft a clause to require the entry of separate identical awards in multiparty claims, rather than a single joint award, if the drafter contemplates facing arbitrations involving a mix of parties with only partial diversity of citizenship.
Nixon Peabody’s Arbitration team is available to assist with issues of drafting or enforcement of arbitration clauses.
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Labor & Employment Alert | 03.16.22