Our prior blog articles predicted that the outcome in Badgerow v. Walters, No. 20-1143, might turn on whether the plain text of the Federal Arbitration Act (FAA) or its purposes would prevail. See our June 16 and Nov. 9, 2021 blog articles on the Badgerow case and the employment dispute that fueled it. As it turns out, Justice Elena Kagan and seven of her colleagues followed the “clear statutory directive” of the FAA and held that federal courts do not have subject matter jurisdiction to confirm or vacate an award under Sections 9 and 10 of the FAA. See 596 U.S. ____ (2022).
The legal backdrop for the decision arose from Vaden v. Discover Bank, 556 U.S. 49 (2009). In Vaden the Supreme Court considered the proper basis to determine federal court jurisdiction over petitions to compel arbitration under Section 4 of the FAA. The opinion, authored by Justice Ruth Bader Ginsburg, focused on the language of Section 4 which states that a 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.
The majority in Vaden concluded, “The 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 for Section 4 petitions. But that language did not exist in Sections 9 and 10 which govern petitions to confirm or vacate an arbitration award.
The District Court in Badgerow, however, determined its jurisdiction based upon the “look through” approach even though it involved language different than in Vaden. Its rationale was that using the look-through approach was necessary “so that ‘consistent jurisdictional principles’ would govern all kinds of FAA applications.”
Based on that approach, the District Court found it “had jurisdiction because Badgerow’s underlying employment action raised federal-law claims.” The Fifth Circuit followed the analysis of the District Court. And, other courts have been divided over the application of the look-through approach to Sections other than Section 4.
The Supreme Court’s analysis in Badgerow differed. Justice Kagan disavowed the policy driven approach, reasoning:
“We have no warrant to redline the FAA, importing Section 4’s consequential language into provisions containing nothing like it. Congress could have replicated Section 4’s look-through instructions in Sections 9 and 10. Or . . . it could have drafted a global look-through provision applying the approach throughout the FAA. But Congress did neither. And its decision governs.” (Emphasis added.)
The Opinion also provides a rationale for the statutory structure based on the overriding purpose of the FAA:
“. . . the ‘preeminent’ purpose of the FAA was to overcome some judges’ reluctance to enforce arbitration agreements when a party tried to sue in court instead. We have never detected a similar Congressional worry about judges’ willingness to enforce arbitration awards already made. So Congress might well have thought an expansion of federal jurisdiction appropriate for petitions to compel alone. Applications about arbitral decisions could and should follow the normal rules.” (Emphasis added and citations deleted.)
Justice Breyer’s dissent pointed to the dark side of the majority decision.
“Although this result may be consistent with the statute’s text, it creates what Vaden feared – curious consequences and artificial distinctions. It creates what I fear will be consequences that are overly complex and impractical.”
As Justice Breyer envisioned, there is no assurance that state courts will apply the same standards to vacate or confirm an award. Will a party have to go through a detailed hearing process to enforce an award otherwise subject to the FAA?
While the decision does not apply to the enforcement of international awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Award because it confers federal jurisdiction, it could still have a major impact on the enforcement or review of many arbitral awards. And it could inject a lack of uniformity in the process throughout the courts of the 50 states.
The “look through” approach adopted in Vaden v. Discover Bank to determine federal jurisdiction does not govern lower court petitions to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA.