A Note on Badgerow v. Walters et al. (No.20-1143, March 31,2022)

At her confirmation hearing Justice Kagan noted “So in that sense, we are all originalists.” (U.S. Senate Judiciary Committee Hearing, p.62, 6/29/2020) Her observation was prescient as adherence to the text has become a polestar of contemporary Supreme Court jurisprudence. In Badgerow v. Walters et al. (No.20-1143, March 31,2022), a case significantly limiting the jurisdiction of federal courts to confirm or vacate arbitral awards under § 9 and § 10 of the Federal Arbitration Act (FAA) Justice Kagan, joined by Chief Justice Robert and 6 other Justices, with Justice Breyer dissenting, rejected a “single, easy-to-apply jurisdictional test” that will produce “sensible” results. Justice Kagan wrote that it is not the function of the court to make public policy decisions to expand its jurisdiction, and “[w]e will not impose uniformity on the statute’s non-uniform jurisdictional rules.”

By way of background, Denise Badgerow instituted an arbitration under rules promulgated by FINRA asserting her employer discriminated against her based-on gender and that she was fired in retaliation for reporting securities violations by her employer. Her claims were dismissed by the arbitrator and Badgerow petitioned the Louisiana state court to vacate the award. Simultaneously, her employer moved the federal court to confirm the award, and Badgerow sought to remand, contending the federal court lacked jurisdiction under § 9 and § 10 of the FAA to vacate or confirm the award. In Vaden v. Discover Bank, 556 U.S. 49 (2009) the Supreme Court held that in deciding whether there is a jurisdictional basis to decide a § 4 petition to compel arbitration, a federal court can “look through” the petition to the “underlying substantive controversy (here employment arbitration involved federal law claims) between the parties.  Applying the Vaden “look-through” approach, the district court confirmed the award and the Fifth Circuit affirmed.

The Supreme Court reversed, holding that Vaden’s “look-through” approach does not apply to § 9 and § 10 of the FAA. Justice Kagan held that when assessing an application to confirm or vacate an arbitral award, a court “may look only to the application actually submitted to it in assessing its jurisdiction.” The textual differences between § 4 of the FAA, which authorizes courts to compel arbitration, and Sections 9 through 11 of the FAA relating to confirmation, vacation, or modification of arbitral awards is determinative. Justice Kagan noted that the language of § 4 empowers the courts to compel arbitration in “any United States district court which, save for such agreement, would have jurisdiction … of a suit arising out of the controversy between the parties.” In contrast, there is no similar language in § 9 through § 11 of the FAA. Justice Kagan noted that “Congress could have replicated § 4’s look-through instructions in § 9 and § 10” or “drafted a global look-through provision” applicable throughout the FAA. “But Congress did neither. And its decision governs.”

Justice Kagan’s analysis is thorough and first establishes as axiomatic that federal courts are courts of limited jurisdiction. “The district courts of the United States are courts of limited jurisdiction, defined (within constitutional bounds) by federal statutes.” ((Slip Opinion p 4 citing Kokkonen v Guardian Life 511 U.S.375,377 (1994)) She then establishes that federal law gives district courts, jurisdiction in two types of cases , diversity of citizenship matters pursuant to 28 U.S.C § 1332(a) and matters arising under federal law pursuant to 28 U.S.C. §1331.

Justice Kagan’s analysis then turns to the FAA itself, and notes that neither 9 U.S.C. § 4 nor 9 U.S.C. § 9 and §10 are independent grants of jurisdiction.  “A federal court may entertain an action brought under the FAA only if that action has an “independent jurisdictional basis” (Hall Street, 552 U.S.at 582) That means an applicant seeking, for example to vacate an arbitral award under Section 10 must identify a grant of jurisdiction, apart from Section 10 itself, conferring “access to a federal forum” (Vaden, 556 U.S. at 59) if she cannot, the action belongs in state court.” (Slip Opinion p.5).

Her analysis continues, “(T)he issue here is about where a federal court should look to determine whether an action brought under Section 9 or 10 has an independent jurisdictional basis. An obvious place is the face of the application itself. If it shows that the contending parties are citizens of a different States… then § 1332 (a)… gives the court diversity jurisdiction. Or if it alleges that federal law (beyond Section 9 or 10 itself) entitles the applicant to relief then Section 1331 gives the court federal-question jurisdiction.” (Slip Opinion p.6). Turning to the case at hand Justice Kagan notes that the parties are from the same state and their application raises no federal question. “Recall that the (parties)are now contesting not the legality of Badgerow’s firing but the enforceability of an arbitral award. That award is no more than a contractual resolution of the parties dispute a way of settling legal claims.” (ibid).

Practitioners need to be alert to this ruling. A party seeking to confirm, modify or vacate an award in federal court must point to an independent jurisdictional predicate to access the federal courts and the court will need to independently determine whether jurisdiction exists. The practical result of this decision is that utilization of Sections 9, 10 and 11 of the FAA will depend on whether there is a jurisdictional basis for the court to entertain a request to modify, vacate or enforce an arbitration award. Thus, for example, an award that determines a federal antitrust violation most likely can only be challenged in federal court if the parties can assert diversity jurisdiction. Indeed, it is difficult to conjure a federal question jurisdictional basis for any arbitration award. As Justice Kagan’s opinion points out you cannot “look through the award to the underlying federal question” to determine jurisdiction. Indeed, the award is nothing more than the result of an arbitration contract entered into between the parties and therefore is enforceable in federal court only if the parties can satisfy the requirements of 28 U.S.C.1331(a).[1] Practitioners that are involved in arbitration disputes where federal claims are at issue should understand the provisions of the relevant state arbitration laws that they may need to rely on in post arbitration issues to confirm or vacate an award. If they fail to do so they may be in for an unpleasant surprise.

[1]  This jurisdictional limitation does not impact international arbitrations awards. Chapter 2 of the FAA governs awards arising under The Convention on the Recognition and Enforcement of Foreign Arbitral Awards and Chapter 3 addresses The Inter-American Convention on International Commercial Arbitration. The United States is a signatory to these treates and the FAA establishes original jurisdiction in the district courts of the United States for proceeding arising out of international arbitral awards and those awards are enforceable under these treaties. (see 9 USC § 203 and 9 USC § 302).

author

Terry Moritz

Terry Moritz is a lawyer and arbitrator with extensive experience in resolving complex commercial disputes .  Mr. Moritz received his B.A.from Loyola University in Chicago and his J.D. from Loyola’s School of Law in 1970. Following a 2-year clerkship in the Federal District Court in Chicago he joined Isham, Lincoln…

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