Supreme Court Limits Federal Court Jurisdiction Under the Federal Arbitration Act

In a little-noticed current choice, a nearly-unanimous U.S. Supreme Court considerably narrowed the jurisdiction of the federal courts to verify, vacate or modify arbitration awards beneath the Federal Arbitration Act (FAA). The choice, Badgerow v. Walters, issued March 31, 2022, units a jurisdictional lure for the unwary lawyer.

Some background: Part 2 of the FAA, enacted in 1922, requires enforcement of “a contract . . . involving [interstate] commerce” to settle controversies by arbitration. Part 4 of the FAA gives {that a} occasion “may petition any United States district court which, save for such agreement, would have jurisdiction under title 28” to compel arbitration. Part 5 permits the identical courtroom to nominate an arbitrator if the events fail to take action. Sections 9, 10 and 11 enable a federal courtroom “in and for the district within which such award was made” to verify an arbitration award, or to vacate or modify an arbitration award on slender grounds. Most states have enacted related statutes. State courts are additionally obligated to implement the FAA.

In Corridor Road Assoc. v. Mattel, Inc., determined in 2008, the Supreme Court held that the FAA doesn’t itself set up federal material jurisdiction, however solely venue. Thus, the petitioner should establish an “independent jurisdictional basis” for the aid requested beneath the FAA. The following yr, in Vaden v. Uncover Financial institution, the Court held that federal jurisdiction over a movement to compel arbitration beneath Part 4 might be established by “looking through” the petition to find out whether or not the underlying arbitration entails variety of citizenship or a federal query.

In Badgerow v. Walters, the Court held that “look-through” federal query jurisdiction is not out there beneath Sections 9, 10 or 11 of the FAA. The petitioner in Badgerow argued that the arbitration award ought to be vacated beneath Part 10 as a result of it was tainted by fraud, and respondent requested the courtroom to verify the award beneath Part 9. Though variety was missing, the district courtroom discovered it had “look through” jurisdiction beneath Vaden as a result of the underlying declare raised a federal query. The Fifth Circuit affirmed. Parsing the variations in language between the FAA sections, the Supreme Court reversed. Eight of the 9 justices joined in the opinion. Solely soon-to-be-retired Justice Breyer dissented.

Badgerow requires an motion to verify, vacate or modify an arbitration award to be filed in state courtroom except the petition reveals that (1) there may be full variety of citizenship between the events and not less than $75,000 in dispute; or (2) the motion to verify, vacate or modify the arbitration award itself raises a query of federal regulation. Neither the FAA nor the points in the underlying arbitration can be enough to fulfill (2). The Badgerow Court doesn’t establish any federal claims that will fulfill (2). As a substitute, the Court explains—counter-intuitively—{that a} problem to the arbitrator’s software of federal regulation usually states a declare solely beneath state contract regulation. That is so, causes the Court, as a result of arbitration is a creature of contract: “[C]laims between non-diverse parties involving federal law . . . may have originated in the arbitration of a federal-law dispute. But the underlying dispute is not now at issue” in a petition to verify, vacate or modify the award. “Rather, the application concerns the contractual rights provided in the arbitration agreement, generally governed by state law. And adjudication of such state-law contractual rights—as this Court has held in addressing non-arbitration settlement of such state-law contractual rights—typically belongs in state courts.”

In his dissent, Justice Breyer denied the end result was mandated by the statutory language, and questioned the practicality of the line the majority drew: “Where the parties’ underlying dispute involves a federal question (but the parties are not diverse), the majority holds that a party can ask a federal court to order arbitration under Section 4, but it cannot ask that same court to confirm, vacate or modify the order resulting under that arbitration under Section 9, 10 or 11. But why prohibit a federal court from considering the results of the very arbitration it has ordered and is likely familiar with? Why force the parties to obtain relief—concerning arbitration of an underlying federal-question dispute—from a state court unfamiliar with the matter?”

Source link