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<img class="alignright wp-image-6283" src="https://www.employmentclassactionreport.com/wp-content/uploads/sites/8/2021/11/security-camera-GettyImages-88858589_1200x630.jpg" alt="" width="438" height="230" />By John B. Lewis

In two prior blogs, we have focused on a dispute over federal court jurisdiction to confirm or vacate an arbitration award under Section 9 and Section 10 of the Federal Arbitration Act (FAA). The dispute resulted in a Fifth Circuit opinion that ultimately made its way to the U.S. Supreme Court. See our blog post on <a href="https://www.employmentclassactionreport.com/arbitration/the-supreme-court-argument-only-underscored-the-complexities-of-federal-court-jurisdiction-over-arbitration-awards/">Nov. 9, 2021</a>. Now the Fifth Circuit has taken on a new FAA issue – who are the “parties” to the controversy for purposes of determining federal court jurisdiction? Does it include state-court pleadings or only “the parties to the petition to compel arbitration”? See ADT L.L.C. v. Richmond, <a href="/wp-content/uploads/sites/7/2023/07/ADT-LLC-v-Richmond.pdf">No. 21-10023</a> (5th Cir. Nov. 10, 2021).

Telesforo Aviles was employed by ADT to install home security systems. At some point, Aviles began spying on customers with cameras he set up. Upon discovering this, ADT terminated Aviles, but only after over 200 customers were impacted. Kamala Richmond believed she and her family were victims. They sued ADT and Aviles in a Texas court seeking over $1 million in damages. The Richmonds’ contract with ADT, however, contained an arbitration provision. ADT then filed an action under Section 4 of the FAA in federal court based on complete diversity between the Richmonds and ADT, a citizen of Florida and Delaware.



Federal Court Jurisdiction

A suit to compel arbitration is properly filed in federal court only if such court could hear “a suit arising out of the controversy between the parties.” 9 U.S.C. § 4. To determine the “controversy,” a federal court must “look through” the Section 4 petition “to the parties’ underlying controversy.” See Vaden v. Discover Bank, 556 U.S. 49, 62 (2009). A court can decide the Section 4 suit if it could hear an action “arising from that ‘whole controversy.’” Id. 67-70.

Based on Vaden, the district court looked through ADT’s federal action to the Richmonds’ Texas court complaint, which named ADT and Aviles as defendants. Based on those facts, the district court concluded that the whole controversy included ADT, Aviles and the Richmonds. That conclusion deprived the court of diversity of citizenship jurisdiction because both Aviles and the Richmonds were from Texas. Consequently, the court dismissed ADT’s action due to a lack of diversity jurisdiction.

ADT appealed, maintaining that Vaden does not apply to determining diversity of citizenship and that the federal circuits are in accord.

The Proper Analysis?

According to Judge Jerry E. Smith, writing for the panel, the district court went an analytical step too far and applied Vaden not only to determine the whole controversy but also to define the parties to the controversy. Yet, according to Section 4, “[t]he only controversy that bears on . . . jurisdiction is ‘the controversy between the parties.’” 9 U.S.C. § 4 (emphasis added). Indeed, Section 4 provides:
<blockquote>[a] party aggrieved by the alleged failure . . . of another to arbitrate under a written agreement for arbitration [may] petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action . . . of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. Id. (emphasis added).</blockquote>
So, according to the panel, “Section 4 uses ‘parties’ to mean only the parties to the § 4 suit: those who refuse to abide by their agreement to arbitrate and those whom they aggrieve by doing so.” Including non-parties to the agreement makes “no textual sense.” And Vaden is not relevant because it never considered the party issue but only what is a controversy for Section 4 jurisdictional purposes. See Vaden, 556 U.S. at 68. Still, the panel felt that Vaden actually supported its understanding of Section 4.

The meaning of parties in Section 4 was taken directly from the section’s language. The panel’s analysis was used by other circuits to “determine diversity of citizenship in a § 4 suit from the parties to that suit,” citing Doctor’s Assocs. v. Distajo, 66 F.3d 438, 445 (2d Cir. 1995).

Hence, the panel determined it had diversity jurisdiction and that the Richmonds and ADT were the parties to ADT’s suit.

But “one wrinkle” remained – if Aviles is actually indispensable to the suit, diversity jurisdiction may be inappropriate. So, the district court must ultimately decide whether Aviles “could be indispensable to an arbitral proceeding to which he never agreed.” The parties, however, can’t stack the deck by adding parties to defeat diversity jurisdiction. See Northport Health Servs. of Ark., LLC v. Rutherford, 605 F.3d 483, 491 (8th Cir. 2010) (a party named in a state court or tort action does not destroy diversity as an indispensable party in a federal suit to compel arbitration).

On remand, the district court was tasked with deciding whether the arbitration agreement was invalid as the Richmonds advocated and whether Aviles was “indispensable” to the federal suit.

Finally, in a concurring opinion, Judge Haynes took the position that the Vaden “look through” test did not apply to diversity jurisdiction cases. Courts should accordingly just “look at” the parties in federal court. He did agree that whether “indispensable parties” exist is a proper issue on remand.

Bottom Line

In determining the parties to a petition to compel arbitration, the court must look solely at parties to the Section 4 suit, not those in related state court litigation.

The Fifth Circuit Now Considers Who Are ‘Parties’ in an FAA Action to Compel Arbitration