By: Proskauer Rose at LLP<\/p>\n\n\n\n
In an 8-1 decision, the United States Supreme Court recently held in\u00a0Badgerow v. Walters<\/em>\u00a0that federal courts may not examine the substance of arbitration disputes to establish federal question jurisdiction under Sections 9 and 10 of the Federal Arbitration Act (the \u201cFAA\u201d). Not only did this decision resolve a circuit split, it, in essence, shifted more responsibility to state courts to confirm or vacate arbitration awards.<\/p>\n\n\n\n The Federal Arbitration Act and Subject Matter Jurisdiction<\/strong><\/p>\n\n\n\n The FAA authorizes a party to an arbitration agreement to petition a federal court for various forms of relief. For example, under Section 4, a party may petition a court to compel arbitration, and Sections 9 and 10 provide that a party may petition a court to confirm or vacate an arbitral award. But the Supreme Court has long held that those sections do not themselves support a federal court\u2019s jurisdiction. Rather, in its 2008 decision,\u00a0Hall Street Associates, L.L.C. v. Mattel, Inc.<\/em>, the Supreme Court ruled that federal courts must have an \u201cindependent jurisdictional basis\u201d to resolve FAA petitions. This means that an applicant seeking to vacate an arbitral award under Section 10, for example, must first identify \u201ca grant of jurisdiction\u201d conferring access by a federal court.<\/p>\n\n\n\n The year after\u00a0Hall Street<\/em>, the Supreme Court held that federal courts have an \u201cindependent jurisdictional basis\u201d to decide a petition to compel arbitration under Section 4 by examining the parties\u2019 \u201cunderlying substantive controversy.\u201d\u00a0Vaden v. Discover Bank<\/em>, 556 U.S. 49 (2009). That is because Section 4\u2019s language provides that a party to an arbitration agreement may petition for an order to compel arbitration in a \u201cUnited States district court which, save for [the arbitration] agreement, would have jurisdiction\u201d over \u201cthe controversy between the parties.\u201d \u201cThe phrase \u2018save for the [arbitration] agreement,\u2019\u201d the Court stated, \u201cindicates that the district court should assume the absence of the arbitration agreement and decide whether [the court] \u2018would have jurisdiction . . .\u2019 without it\u201d by looking through the \u201cunderlying substantive controversy\u201d between the parties.<\/p>\n\n\n\n Thus, if the underlying \u201ccontroversy\u201d falls within the court\u2019s jurisdiction\u2014for example, by presenting a federal question\u2014then federal courts have a jurisdictional basis to rule on the Section 4 petition to compel. But since\u00a0Vaden<\/em>, lower courts have been split over whether the same \u201clook through\u201d approach can establish jurisdiction when the application before the court seeks\u00a0not<\/em>\u00a0to compel arbitration under Section 4, but rather seeks to confirm, vacate, or modify an arbitral award under Sections 9 and 10 of the FAA. That was the question before the Supreme Court in\u00a0Badgerow<\/em>\u00a0v. Walters<\/em>, 596 U.S. __ (2022).<\/em><\/p>\n\n\n\n Lower Court Rulings<\/strong><\/p>\n\n\n\n Badgerow\u00a0<\/em>grew out of the arbitration of an employment dispute. The petitioner, who worked as a financial advisor for a firm run by the respondents, initiated an arbitration proceeding alleging wrongful termination under both state and federal law. After the arbitrators dismissed her claims, the petitioner sued in Louisiana state court to vacate the arbitral award. She alleged that fraud had tainted the arbitration proceeding.<\/p>\n\n\n\n Because the \u201cunderlying controversy\u201d\u2014wrongful termination under state and federal law\u2014presented a federal question, the respondents removed the case to federal court, where they applied to confirm the arbitral award. The petitioner then sought to remand the action to state court, arguing that the federal court lacked an \u201cindependent jurisdictional basis\u201d to confirm or vacate the award under Sections 9 and 10 because the issue before the court was\u00a0not\u00a0<\/em>the federal wrongful termination claims, but rather the enforceability of the arbitral award, which is generally a state law issue.<\/p>\n\n\n\n Relying on\u00a0Vader<\/em>, the District Court for the Eastern District of Louisiana \u201clooked through\u201d the petition to the \u201cunderlying substantive controversy\u201d and determined that it had subject matter jurisdiction because the underlying substantive controversy presented a federal question\u2014wrongful termination under federal law. The District Court then determined that fraud did not taint the arbitration proceeding, granted the respondents\u2019 application to confirm, and denied the petitioner\u2019s application to vacate. The Fifth Circuit affirmed, citing\u00a0Vader\u00a0<\/em>and the importance of a \u201cprinciple of uniformity\u201d that dictated using the same approach for Section 9 and 10 actions as is used for petitions to compel under Section 4.<\/p>\n\n\n\n Supreme Court Ruling<\/strong><\/p>\n\n\n\n The Supreme Court disagreed. It held that\u00a0Vaden\u2019s\u00a0<\/em>\u201clook-through\u201d approach does not apply to petitions to confirm or vacate arbitral awards under Sections 9 and 10. The Court first observed that Sections 9 and 10 contain \u201cnone of the statutory language on which\u00a0Vaden\u00a0<\/em>relied . . . Indeed, Sections 9 and 10 do not mention the court\u2019s subject matter jurisdiction at all.\u201d The Court then discussed the well-settled principle of construction that \u201cwhen Congress includes particular language in one section of a statute but omits it in another section of the same Act, we generally take the choice to be deliberate.\u201d<\/p>\n\n\n\n Next, the Court rejected the \u201cmore thought-provoking\u201d policy arguments upon which the respondents\u2014and the lower courts\u2014relied. While the respondents \u201cpreache[d] the virtues of adopting look-through as a single, easy-to-apply jurisdictional test that will produce sensible results,\u201d the Supreme Court stressed that \u201ceven the most formidable policy arguments cannot overcome a clear statutory directive.\u201d According to the Court, \u201chowever the pros and cons shake out, Congress has made its call [and] [w]e will not impose uniformity on the statute\u2019s non-uniform jurisdictional rules.\u201d Thus, the Court determined that\u00a0Vaden\u2019s\u00a0<\/em>\u201clook through\u201d approach \u201cdoes not apply to requests to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA.\u201d<\/p>\n\n\n\n Takeaway<\/strong><\/p>\n\n\n\n The effect of the Supreme Court\u2019s decision is to give state courts a more \u201csignificant role\u201d in implementing the FAA. It is possible that this outcome will cause unnecessary complexity between cases brought under Section 4 on the one hand, and under Sections 9 and 10 on the other; Section 4 cases will be adjudicated by federal district courts, while cases under Sections 9 and 10 will be up to individual states. According to eight justices, that result is appropriate and not necessarily a cause of concern, as the \u201cFAA requires [state] courts, too, to honor arbitration agreements.\u201d Justice Breyer\u2019s dissent, however, expressly considered the implications of the majority\u2019s decision, noting that it conflicted with the \u201cclear policy of rapid and unobstructed enforcement of arbitration agreements.\u201d Whether the impact of the\u00a0Badgerow<\/em>\u00a0decision actually results in such confusion will be borne out in future, and likely state court decisions.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" By: Proskauer Rose at LLP In an 8-1 decision, the United States Supreme Court recently held in\u00a0Badgerow v. Walters\u00a0that federal courts may not examine the substance of arbitration disputes to establish federal question jurisdiction under Sections 9 and 10 of the Federal Arbitration Act (the \u201cFAA\u201d). Not only did this […]<\/p>\n","protected":false},"author":1,"featured_media":1514,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"advanced_seo_description":"","jetpack_seo_html_title":"","jetpack_seo_noindex":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[84],"tags":[195,196,538],"class_list":["post-1510","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-nicarb-adr-developments","tag-adr-2","tag-arbitration-2","tag-nicarb-nigeria","col-lg-4 col-md-6"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/blog.nicarb.org\/wp-content\/uploads\/2022\/06\/pic2-2.jpg?fit=910%2C607&ssl=1","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/pcb80P-om","jetpack_likes_enabled":true,"_links":{"self":[{"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/posts\/1510","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/comments?post=1510"}],"version-history":[{"count":3,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/posts\/1510\/revisions"}],"predecessor-version":[{"id":1530,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/posts\/1510\/revisions\/1530"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/media\/1514"}],"wp:attachment":[{"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/media?parent=1510"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/categories?post=1510"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.nicarb.org\/index.php\/wp-json\/wp\/v2\/tags?post=1510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}