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Justices Limit Federal Jurisdiction Over Arbitration Awards (1)

March 31, 2022, 3:07 PMUpdated: March 31, 2022, 3:58 PM

The U.S. Supreme Court restricted Thursday when federal courts have jurisdiction to confirm or vacate an arbitration award under certain sections of the Federal Arbitration Act.

The FAA authorizes parties to an arbitration agreement to petition a federal court for various forms of relief, but that doesn’t itself create jurisdiction over the matter. Therefore a federal court must have an “independent jurisdictional basis” to resolve the matter, the high court said.

In 2009, the Supreme Court held that in deciding whether there’s a jurisdictional basis to decide a petition to compel arbitration under Section 4 of the FAA, a federal court can “look through” the petition to the “underlying substantive controversy” between the parties, even if that controversy isn’t before the court.

“If the underlying dispute falls within the court’s jurisdiction—for example, by presenting a federal question—then the court may rule on the petition to compel,” the court said in Thursday’s opinion, explaining the 2009 decision. “That is so regardless whether the petition alone could establish the court’s jurisdiction,” it said.

The same look-through approach to jurisdiction doesn’t apply to requests to confirm or vacate arbitral awards under Sections 9 and 10, the court said in an 8-1 opinion by Justice Elena Kagan, which resolved a circuit split. A court “may look only to the application actually submitted to it in assessing its jurisdiction,” it said.

It’s a normal and sensible division of judicial labor for Section 9 and 10 applications to “go to state, rather than federal, courts when they raise claims between non-diverse parties involving state law,” the court said.

Even if the claims originated in the arbitration of a federal-law dispute, that dispute is really no longer the issue, the court said. “Rather, the application concerns the contractual rights provided in the arbitration agreement, generally governed by state law,” and such cases typically belong in state courts, it said.

Congress created an exception for Section 4 petitions to compel. “But it is one thing to make an exception, quite another to extend that exception everywhere,” the court said.

Justice Stephen G. Breyer was the lone dissenter, saying he feared the majority’s approach “creates unnecessary complexity and confusion.”

“I suggest that by considering not only the text, but context, structure, history, purpose, and common sense, we would read the statute here in a different way,” Breyer said. These considerations “favor a uniform look-through approach,” he said.

The case centered on Denise Badgerow’s claim she was improperly fired by REJ Properties. Arbitrators sided with her employers, but she sued in Louisiana state court to vacate, alleging the arbitration was tainted by fraud. The defendants removed to federal court, which applied the look-through test, found it had jurisdiction because Badgerow’s underlying employment action raised federal law claims, and confirmed the award.

The high court reversed and remanded.

Badgerow is represented by Haynes & Boone LLP. Respondents Greg Walters, Thomas Meyer, and Ray Trosclair are represented by Williams & Connolly LLP.

The case is Badgerow v. Walters, U.S., No. 20-1143, 3/31/22.

(Updated with parties' counsel and additional analysis from the court)

To contact the reporter on this story: Brian Flood in Washington at bflood@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com

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