Hamp Watson | Vacating Your Arbitration Award: A Split About Access to Federal Courts

When a case litigated in court goes horribly wrong, there’s a clear remedy: appeal. But, what happens when your case goes not through court, but arbitration, and the proceedings are grossly unfair? You cannot appeal: that would seriously undermine the purposes of arbitration, to provide a fast resolution of a case at a cheaper cost than litigation. There is only one possible escape hatch: federal law provides that, in a limited set of very unfair situations, you can ask a court to vacate or modify the arbitrator’s award.

But if you bring this petition in federal court, another obstacle lurks in the background: the federal court’s subject-matter jurisdiction to even consider a petition to vacate. A new circuit split has popped up on that question.

BACKGROUND

The Federal Arbitration Act, passed in 1925, controls arbitration proceedings nationwide. Prior to its passage, arbitration agreements weren’t always enforceable. The Act, however, is binding on all agreements to arbitrate nationwide (no matter what state law says) via the Supremacy Clause of the Constitution. Broadly speaking, the FAA says that (1) if you enter into an agreement to arbitrate disputes, then you have to arbitrate disputes; and (2) the award your arbitrators give is enforceable via converting it into a judgment of a court (which judges are almost always required to enter).

There are only six circumstances where judges can mess with the results of arbitration. Section 11 of the FAA provides two situations that allow an award to be modified. The other four situations, copied from § 10 of the FAA, allow the award to be completely vacated:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

And that’s it.

IS THERE FEDERAL SUBJECT MATTER JURISDICTION?

Now, the jurisdictional problem.

We all know from civil procedure and federal courts that each claim in a federal case must be supported by federal subject-matter jurisdiction—usually § 1331 “federal question” jurisdiction or § 1332 “diversity” jurisdiction—or it cannot be heard in federal court. But, even though § 10 of the FAA is federal law, the Supreme Court has held that § 10 “does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.” Moses H. Cone Mem’l Hospital v. Mercury Constr. Corp. (1983).

This, by the Court’s own admission, makes § 10 an “anomaly” among federal statutes. Id. And it seriously jeopardizes a party’s ability to bring a § 10 petition in federal court after something goes wrong.

One more thing before we reach the circuit split. The Supreme Court in Vaden v. Discover Bank (2009) addressed federal jurisdiction over petitions brought under a different portion of the FAA, § 4. That section allows a party to ask a court to enforce an agreement to arbitrate disputes. Typically, a party who is sued in court will be demanding that the dispute has to be resolved in arbitration because the parties agreed ahead of time by contract to submit all disputes to arbitration.

Vaden says a § 4 petition itself does not have to be supported by federal jurisdiction. Instead, the court can “look through” the § 4 petition to the underlying dispute; if the federal courts would have jurisdiction over the underlying dispute, they can hear the § 4 petition.

The Court’s holding is textual. The language of § 4 provides that the party wanting to compel arbitration “may petition any United States district court which, save for such agreement [the agreement to arbitrate all disputes], would have jurisdiction” over the dispute.

THE CIRCUIT SPLIT: THIRD, SEVENTH, AND D.C. VS. SECOND

Now, the split.

In 1996 and 1999, respectively, the Seventh Circuit and D.C. Circuit held that petitions to vacate arbitral awards under § 10 must be independently supported by federal subject-matter jurisdiction.  The courts cannot “look through” the petitions to see if they would have had subject-matter jurisdiction over the underlying case. That’s because § 10 doesn’t have the language quoted above from § 4, and because of the purpose of the FAA: as the Seventh Circuit wrote, “The central federal interest was enforcement of agreements to arbitrate, not review of arbitration decisions.”

This year, the Third Circuit joined the Seventh and D.C. Circuits, writing that Vaden didn’t change anything about the analysis for § 10:

Neither the textual nor practical considerations noted by the Court in Vaden apply in a case relying on § 10 of the FAA. Section 10 lacks the critical ‘save for such agreement’ language that was central to the Supreme Court’s Vaden opinion. It provides that ‘the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration….’ 9 U.S.C. § 10. There is no reference to the subject matter of the underlying dispute. Thus, while § 4 calls for a court to consider whether it would have jurisdiction over the ‘subject matter of a suit arising out of the controversy between the parties,’ § 10 makes no such demand.

The Second Circuit, however, created a circuit split in Doscher v. Sea Port Group Securities, LLC, handed down this August just 11 days before the Third Circuit’s decision.

The Second Circuit said Vaden did change the analysis for § 10, because the FAA can’t expand federal jurisdiction, and if Vaden found federal subject-matter jurisdiction under § 4 without expanding federal jurisdiction, that must mean the “look through” approach is implicitly authorized for the other sections of the FAA:

[T]he necessary result of limiting the look-through approach solely to § 4 petitions is to conclude that the same dispute between the parties would be sufficient to confer § 1331 jurisdiction for the purposes of § 4 petitions but insufficient to confer § 1331 jurisdiction for the purposes of any of the Act’s other remedies. That is simply not logically possible without construing § 4 to expand federal jurisdiction—a conclusion the Supreme Court has expressly forbidden us to draw.

The Second Circuit’s reasoning—a close read of the principles laid out in Vaden—is, by its own admission, “complicated.” But it’s also purposive. The Second Circuit disagreed with the quotation above from the Seventh Circuit that the text of the FAA only gives “look-through” federal subject-matter jurisdiction in § 4 petitions:

[T]here is a certain absurdity to an interpretation that permits parties to file motions to compel arbitration in any case where the underlying dispute raises a federal question but precludes them from seeking the same federal court’s aid under the Act’s other remedial provisions related to the same dispute . . . . If enforcement were Congress’s only goal, however, it would have had no need to pass §§ 10 or 11 at all.

LOOKING FORWARD

Ultimately, parties can always bring § 10 petitions in state court, but a resolution of this circuit split will be necessary if we are to know whether federal courts can hear § 10 petitions.

*Thank you to Professors Phillip Armstrong and John Allgood for sending us this interesting split.