I finished Monday’s “Highlights” with the hope that this would be a quiet week. Well, at least on the published case front, it has so far been too quiet. Only one case to discuss today, although it is both interesting and significant.
“Look through” doctrine and diversity of citizenship
It is blackletter law that the Federal Arbitration Act does not create subject matter jurisdiction over actions to vacate or compel arbitration. The District Court must find its jurisdiction elsewhere. Such jurisdiction in the arbitration arena is generally premised on diversity under 28 U.S.C. 1332. New York Convention cases are the major exception, as disputes thereunder are by statute federal questions, 9 U.S.C. §203.
In Vaden v. Discover Bank, 556 U.S. 49 (2009), the Supreme Court opined that the court, at least in arbitration cases involving federal questions, should “look through” the allegations of the complaint to determine the crux of the dispute. Generally, this doctrine is applied to determine the amount in controversy, i.e., does the underlying dispute as to which one party seeks to compel arbitration involve a claim for more than $75,000. ADT LLC v. Richmond, 2021 U.S. Dist. LEXIS 8830 (N.D. Tex. Jan. 8, 2021) extends the “look through” principle to the determination of whether there is diversity of citizenship.
The dispute arises out of the Richmonds’ claim that a then-ADT employee, Aviles, gained improper access to their in-home security camera and monitored their personal activities. Richmonds sued both ADT and Aviles in state court. Because Richmonds had signed an arbitration agreement at the time the ADT system was installed, ADT brought this federal action to compel arbitration under the FAA. Significantly, ADT here named only the Richmonds as defendants; it did not include Aviles. ADT is a citizen of Delaware and Florida; Richmonds are citizens of Texas. Consequently, the lineup of the parties in the case provided complete diversity. As there is no question that the amount in controversy exceeds $75,000, both parties assumed that there was federal diversity jurisdiction and briefed ADT’s motion for summary judgment around the usual issues of contract formation and scope of arbitrability.
Acting sua sponte, Judge O’Connor ordered the parties to address the existence of subject matter jurisdiction. It is worth reading his order on PACER, as it is an in-depth analysis which presages his opinion and provides defendants the roadmap for their successful argument. One suspects that the judge had been thinking about this issue for awhile and was waiting for a case in which to raise it.
The court’s opinion starts with Vaden’s “look through” principle. Although the only parties in the case before him are ADT and the Richmonds, among whom there is diversity, the judge holds that the court is required to look at how parties are arrayed in the state litigation, even those who are not parties to the federal case. There Avies, who is a Texas resident, is also a party and, like ADT, is on the defendant side of the case. As a result, Avies, a Texas citizen, and the Richmonds, also Texas residents, are opposing parties and there is not complete diversity of citizenship. Since Section 1332 jurisdiction would, therefore, not exist if the case had been brought directly to federal court, Judge O’Connor dismisses the action for lack of subject matter jurisdiction. In doing so, he rejects the Eighth Circuit’s holding in Northport Health Services of Arkansas, LLC v. Rutherford, 605 F.3d 483 (8th Cir. 2010) that, in considering diversity in an action to compel arbitration, the court looks only at the citizenship of parties in the case before it, plus any indispensable parties; the citizenship of others involved in the underlying litigation is irrelevant. Point-by-point, Judge O’Connor sets forth his reasoning for why Northport is inconsistent with SCOTUS’s Vaden holding. Without much discussion, he also rejects the decisions in the Second, Fourth, Seventh, Ninth and Eleventh Circuits to which Northport cites. Rather than follow what he calls “a battle of the dicta,” Judge O’Connor looks for support to the Fifth Circuit’s language in Lower Colorado River Authority v. Papalote Creek II, LLC, 858 F.3d 916 (5th Cir. 2017), in which he opines “the Fifth Circuit acknowledged that it saw ‘no reason that the [Vaden] holding is limited to only that specific jurisdictional issue [, federal question]’” (Brackets in the original).
It will be interesting to see how the “look through” doctrine as applied here goes forward. ADT argued that the court should not dismiss the case because the Fifth Circuit, which encompasses Texas, had not yet addressed whether the look-through approach should be applied to diversity jurisdiction. Well, the Court of Appeals will get a chance to do so, as ADT filed a notice of appeal on January 13th. Ultimately, if that decision follows Judge O’Connor’s lead, we can expect to see this case before the Supreme Court in light of the resulting Circuit split on a significant issue. Meanwhile, read this opinion and put it away for consideration in your next opposition to a motion to compel. Regardless of whether you agree with the court’s result, it is scholarly, well-reasoned and worth your time.
Events and learning
Mark your calendar
The ABA’s Dispute Resolution Section will hold its Spring Conference from April 14 to April 17, 2021. The CLE at this program is consistently first-rate.
ICC Commission Report
On January 19th, the ICC Commission on Arbitration and ADR released the results of its multi-year study on “The Accuracy of Fact Witness Memory in International Arbitration.” It is a major and useful piece of work, well worth reading. While a lot of its findings are intuitive to attorneys in common law jurisdictions who spend their courtroom lives presenting witnesses and their time outside the room preparing them, it provides scientific background to what we “know” experientially. Also, it provides ammunition for advocates to cite in post-hearing briefs and will probably be a routine citation in International Court of Arbitration cases. It can be found on the ICC website, iccwbo.org, under the “Find a Document” tab, by typing “Accuracy of Fact” in the search space.
I hope to be writing on Friday, but may have some technical issues, since I’ll be doing a computer switchover. If not Friday, I’ll see you Monday.
David A. Reif