U.S. Supreme Court Limits Federal Courts’ Jurisdiction to Confirm or Vacate Arbitral Awards

On March 31^st, the U.S. Supreme Court in Denise A. Badgerow v. Greg Walters, et al., decided an extremely important case regarding federal courts’ ability to confirm or vacate arbitral awards. Previously, the Court held in Vaden v. Discover Bank that under Section 4 of the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq., a federal court may decide whether to enforce an agreement to arbitrate so long as the court has jurisdiction via the petition itself or through the underlying substantive controversy (the “look-through approach”). The Court found in Badgerow, however, that petitions seeking to have a federal court confirm or vacate arbitral awards are different.

Procedural Posture

The underlying dispute in Badgerow involved arbitration of an unlawful termination claim under both federal and state law. After the arbitrators sided with the respondent and dismissed the petitioner’s claims, the petitioner sued the respondent in Louisiana state court to vacate the arbitral decision. In response, the respondent removed the case to Federal District Court and applied to confirm the arbitral award. The petitioner argued that the federal court did not have jurisdiction under Sections 9 and 10 of the FAA to decide whether to uphold the arbitral award. The Federal District Court adopted the look-through approach utilized in Vaden to find that it did have jurisdiction. The United States Court of Appeals for the Fifth Circuit affirmed the Federal District Court’s finding of jurisdiction. The U.S. Supreme Court disagreed, however, and reversed.

The Supreme Court’s Reversal

U.S. federal courts’ jurisdiction is limited to two types of cases: diversity cases (suits between citizens of different states as to any matter valued at more than USD 75,000.00) or federal-question cases (suits arising under federal law). The FAA authorizes parties to arbitration agreements to ask the federal courts for assistance through petitions to compel arbitration (under Section 4) and to confirm, vacate, or modify arbitral awards (under Sections 9 through 11). These petitions, however, must still have an independent jurisdictional basis. This means the actual petition itself must involve a diversity issue or a federal question issue; otherwise, they belong in a state court.

Since the petitioner and the respondent in Badgerow were from the same state and the application contested the enforceability of the arbitral award rather than the wrongful termination at issue in the arbitration, there was no diversity nor federal issue. To get around this, the Federal District Court adopted the look-through approach utilized in Vaden to go beyond the face of the application to where there was a federal law claim in the underlying employment action. The Court in Vaden found that Section 4 of the FAA allowed a federal court to look to the underlying controversy through Congress’s express language that a party to an arbitration agreement may petition for an order to compel arbitration in a “United States district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties.” (Emphasis added.) The Court reasoned that the words “save for [the arbitration] agreement” instruct a court not to find jurisdiction by looking to the petition to enforce the agreement but rather to the underlying controversy of the parties. In Badgerow, however, the Court held that Sections 9 and 10 of the FAA contained different language, as they lacked the “save for” clause, and thus the look-through method should not apply under ordinary principles of statutory construction.

Key Takeaways From the Opinion and Dissent

• 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; therefore, Section 4 petitions to compel arbitration call for an expansion of federal jurisdiction (thus, the look-through approach).
  
  
• FAA Section 9 and 10 applications to confirm or vacate arbitral awards, when they raise claims between non-diverse parties involving state law, concern the contractual rights provided in the arbitration agreement which are generally governed by state law and belong in state courts.
  
  
• Other sections of the FAA may now be impacted by this new decision. For instance, Section 5 allows a petition to the court to designate and appoint an arbitrator. Justice Breyer in his dissent states that a party could ask a judge to order arbitration under Section 4 but then might not be able to ask that same judge to appoint an arbitrator. Section 7 allows a federal judge to compel attendance of witnesses. The dissent underlines the issues that could arise if a witness lives out of State but another lives in State and who exactly the parties for diversity jurisdiction purposes in that situation are.
  
  
• It will now be extremely difficult to bring an application to confirm or vacate an arbitral award in federal court. If the arbitration agreement does not involve a federal issue, it could be tough to prove the USD 75,000.00 threshold required for diversity jurisdiction on the face of the petition alone.
  
  

Conclusion

It will be interesting to see how the law progresses with regard to the other sections of the FAA dealing with federal court powers and how the federal courts decide which roles they may take on and which must be left to the state courts. For now, at least, it is clear that federal courts are very limited in their ability to decide to confirm or vacate arbitral awards. That issue remains almost solely within the state courts’ purview.