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The U.S. Supreme Court has now granted certiorari to decide if federal courts have subject matter jurisdiction to confirm or vacate an arbitration award under the Federal Arbitration Act (FAA), Sections 9 and 10.  9 U.S.C. §§ 9 &amp; 10.  See Badgerow v. Walters, No. 20-1143 (Cert. granted 5-17-21).  The question presented is “[w]hether federal courts have subject matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the FAA where the only basis for jurisdiction is that the underlying dispute involved a federal question.”  (Emphasis added)

In its related opinion, the Fifth Circuit found a district court had subject matter jurisdiction over the plaintiff’s petition to vacate an arbitration award despite issues raised by earlier Supreme Court precedent.  See 975 F.3d 469 (2020). 

The underlying case had a complex procedural history, not uncommon for an arbitration dispute involving multiple defendants. Denise Badgerow had been employed as an associate financial advisor by REJ Properties, Inc. (REJ), a Louisiana corporation whose principals were independent financial advisors for Ameriprise Financial Services, Inc. (Ameriprise).  While employed by REJ, Badgerow signed an agreement to arbitrate any disputes she had with Ameriprise or its affiliates, which included the three principals for whom she worked, before an arbitration panel of the Financial Industry Regulatory Authority (FINRA).  After her termination, Badgerow began an arbitration proceeding against the three principals before FINRA.  Ameriprise then moved to compel arbitration in a separate federal action and Badgerow brought a declaratory judgment claim against Ameriprise before the FINRA arbitrators.  Finally, in December 2018, the FINRA panel dismissed all of Badgerow’s claims against the principals and Ameriprise.

Unhappy with the result, Badgerow filed an action in Louisiana state court to vacate the FINRA award against her.  The principals removed the Louisiana action to vacate the award to federal court. Badgerow responded with a motion to remand, denying that federal jurisdiction existed.  And, the principals filed a motion to confirm the FINRA arbitral award.

The district court found federal subject matter jurisdiction over Badgerow’s petition to vacate and denied the motion to remand to state court.

The Analysis

A federal district court’s jurisdiction over a FAA claim is more complicated because “the Act is ‘something of an anomaly’ in the realm of federal legislation: It ‘bestow[s] no federal jurisdiction but rather require[es] [for access to a federal forum] an independent jurisdictional basis over the parties’ dispute.”  Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), quoting Moses H. Cove Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1, 25, n. 32 (1983). The Supreme Court’s prior decision in Vaden v. Discover Bank, 566 U.S. 49 (2009) was both useful and problematic in certain respects.

In Vaden the Supreme Court considered the proper analysis to determine federal court jurisdiction over petitions to compel arbitration under Section 4 of the FAA.  Ultimately, the Court concluded that jurisdiction could be determined under a “look through approach”, focusing on whether the underlying dispute involves a federal claim.  In reaching that conclusion, the court was persuaded by the specific language of Section 4, which does no exist elsewhere in the Act.  That language provides that the petition to compel arbitration can be filed in “any United States district court which, save for [the arbitration] 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.”  9 U.S.C. § 4.

According to the majority opinion in Vaden, authored by Justice Ginsburg, “[t]he phrase ‘save for [the arbitration] agreement’ indicates that the district court should assume the absence of the arbitration agreement and determine whether it “would have jurisdiction . . .’ without it.”  See 556 U.S. at 66.  Thus, the Vaden court approved the use of the “look through” approach.

Armed with that analysis, the Fifth Circuit found that the federal claim asserted against Ameriprise in the FINRA arbitration provided federal jurisdiction over the petition to vacate the FINRA arbitrators’ dismissal award.

But, the Vaden decision and its focus on the text of Section 4, has also caused some confusion among the lower courts.  Indeed, the briefing on Badgerow’s petition confirmed a circuit split.  The First, Second, Fourth and Fifth Circuits apply the “look through” approach to applications to confirm or vacate an arbitration award but the Third and Seventh Circuits do not.  See Ortiz-Espinosa v. BBVA Securities of Puerto Rico, 852 F. 3d 36 (1st Cir. 2017), Landau v. Eisenberg, 922 F.3d 495, 498 (2d Cir. 2019), McCormick v. America Online Inc., 909 F.3d 677 (4th Cir. 2018), and Quezada v. Bechtel OG&amp;C Const. Servs., Inc., 946 F.3d 837 (5th Cir. 2020), versus Magruder v. Fidelity Brokerage Servs., LLC, 818 F.3d 285 (7th Cir. 2016), and Goldman v. Citigroup Global Mkts. Inc., 834 F.3d 242 (3d Cir. 2016).

In Quezada, the Fifth Circuit concluded that the look-through analysis should be applied equally to Section 4 petitions to compel arbitration and to petitions to confirm, vacate or modify awards under Sections 9-11.  946 F.3d at 842-43.  Significantly, the Fifth Circuit panel rejected the notion that difference in language between Section 4 and the other Sections, ended the inquiry.  Instead, the Court found the FAA was to be treated as “a single comprehensive statutory scheme” and that the “principle of uniformity dictated the same approach for determining jurisdiction under each section of the statute.”  Id. at 842.

The enforcement of arbitral awards is a significant issue for the federal courts.  And, while the state courts are to play a role under the FAA, uniformity of enforcement is an overriding concern today.  The Supreme Court’s resolution of Badgerow could depend on whether the use of the language “save for the agreement” in Section 4 dramatically restricts the application of the “look through” approach or whether application of the approach to all arbitration related proceedings is consistent with the overall policy of the FAA.

Merits briefing in Badgerow is to be complete in September 2021.

Bottom Line:

The Supreme Court’s decision in Badgerow will be of major importance for FAA arbitration proceedings but the outcome could vary if driven solely by the text of Section 4 or instead by the Act’s overriding policy.

The Supreme Court Now To Determine the Boundaries of Federal Court Jurisdiction Over Federal Arbitration Act Proceedings