SCOTUS has been active on the arbitration front since the last appearance of Highlights.  Today’s primary focus is on the Court’s decision yesterday restricting the scope of federal subject matter jurisdiction over applications to confirm or vacate arbitration awards. There are also threads to commentary on the other matters argued before the Supremes over the last three weeks.

SCOTUS and FAA jurisdiction

Continuing its focus this Term on arbitration, the Supreme Court issued a significant decision on Thursday.  In Badgerow v. Walters, 2022 U.S. LEXIS 1794 (March 31, 2022), the Court, in an 8-1 opinion written by Justice Kagan, held that the doctrine of “look through” jurisdiction does not apply to petitions to vacate or confirm an award.

The Court’s reasoning begins with the basic principle that, although the FAA authorizes District Courts to compel arbitration, stay litigation during that process, and confirm or vacate an award, it does not independently create subject matter jurisdiction.  Rather, as the Court says in Badgerow, “the federal court must have what we have called an ‘independent jurisdictional basis’ to resolve the matter,” quoting Hall Street Associates, L.L.C. v. Mattel, Inc, 552 U.S. 576, 582 (2008).  For example, where there is diversity of citizenship and the requisite jurisdictional amount, the court has subject matter jurisdiction over an FAA proceeding under 28 U.S.C. § 1332(a).  However, what if there is no diversity, but the dispute involves a federal statute?  In Vaden v. Discover Bank, 556 U.S. 49 (2009), SCOTUS held that a federal court may “look through” the application before it to the underlying dispute, and, if that issue involves a federal question, the District Court may hear an application under Section 4 of the FAA to compel arbitration. Badgerow addresses whether the same “look through” jurisdiction applies to applications under FAA Sections 9 and 10 to confirm or vacate an award.  Finding that “those sections lack Section 4’s distinctive language directing a look-through, on which Vaden rested,” the majority holds that the doctrine cannot be used to give a federal court subject matter jurisdiction to deal with an award.

Section 4 provides that a party to an arbitration agreement may “petition any United States district court which, save for such agreement, would have jurisdiction  . .  . of the subject matter of a suit arising out of the controversy between the parties” for an order compelling arbitration (Emphasis added).   Thus, for example, where the underlying dispute involves a Title VII claim between non-diverse parties, the District Court may compel arbitration, since it would be able to hear a lawsuit raising those claims.  The italicized language in Section 4 does not appear in either Section 9 or 10 of the FAA.  Thus, Justice Kagan writes, “under ordinary principles of statutory construction, the look-through method for assessing jurisdiction should not apply [to applications governed by those Sections.] ‘[W]hen Congress includes particular language in one section of a statute but omits it in another section of the same Act,’ we generally take the choice to be deliberate.”

In dissent, Justice Breyer, while not quite saying “the statutory language be damned,” takes a very practical approach. Or, as he puts it, “When interpreting a statute, it is often useful to consider not simply the statute’s literal words, but also the statute’s purposes and the likely consequences of our interpretation.  Otherwise, we risk adopting an interpretation that, even if consistent with the text, creates unnecessary complexity and confusion.”  He, then, brings out the classic “parade of horribles” that might arise from the absence of “look through” jurisdiction.  However, he does not limit the band in that parade to playing only tunes from Sections 9 and 10, which are the direct subject of the issue before the Court; rather, Justice Breyer walks through the effects of the absence of jurisdiction on Sections 5 (appointment of the arbitrator), Section 7 (compelling attendance of persons the arbitrator has summoned), and Section 11 (the modification of the award).   In short, he asks “why prohibit a federal court from considering the results of the very arbitration it has ordered and is likely familiar with?  Why force the parties to obtain relief – concerning arbitration of an underlying federal-question dispute – from a state court unfamiliar with the matter?” (Emphasis in original).  He opines that the  majority’s answer to that question – because that’s what Congress told us to do – is not the only reading of Section 4.  Thus, he would not limit his consideration of Section 4’s text just to what it permits the court to do; rather, he would focus on the fact that it does not prohibit the application of look-through jurisdiction elsewhere in the statute. While this view of statutory construction has an Alice in Wonderland quality,[1] it results in a far greater consistency and efficiency in arbitration than would the majority’s bifurcated standard.  What is clear from Justice Breyer’s lengthy, but solo, dissent is that his real goal is to provide a roadmap for Congressional action to clear up the inefficiencies which the majority has imposed on the FAA.

So, what are some of the implications of Badgerow, beyond the pure scope of the holding?  First, the case may impact whether federal courts continue to dismiss actions, rather than merely staying cases, when they compel arbitration, cf., Egan v. PJ Louisiana, LLC, 2022 U.S. Dist. LEXIS 45701 (W.D. La. March 14, 2022).  Section 4 of the FAA does not address the propriety of a stay versus a dismissal of the underlying litigation when the court orders arbitration.  Rather, the statute merely provides that the “court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.”  As Justice Breyer suggests, by merely staying the case, rather than dismissing it, the District Court retains its initial Section 4 jurisdiction, so that the judge may continue to supervise the arbitration and vacate or confirm the result.  The downside of such an approach from the viewpoint of the party opposing arbitration is that an order compelling arbitration is not appealable, while dismissal of the action is ordinarily an appealable final judgment.  As a result, absent permission for an interlocutory appeal, that party must live with arbitration all the way through the final award before it can effectively challenge the District Court’s order.

Also, what does the Supreme Court’s laser-like focus on the language of the statute bode for the remaining vitality of the “manifest disregard” standard for vacatur of an award?  While the phrasing of the standard varies among Circuits, the doctrine essentially authorizes the court to vacate an award where the arbitrator intentionally disregards the law.  Section 10 of the FAA, however, enumerates only four grounds for vacating an award, and “manifest disregard” is not among them.  The closest that one can come to finding support for the doctrine in the FAA’s actual language is to argue that such a failure to follow the law means that the arbitrators “exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made”  – a ground to vacate under Section 10(a)(4).  But, issues of the “powers” of the arbitrator are generally considered to be a question of whether the subject matter of the dispute falls within the scope of the arbitration clause, not one of how the arbitrator performs his or her duties.  Likewise, even if the arbitrator ignores the law, isn’t the award itself still “mutual, final, and definite.”  In light of the already-existing Circuit split on the continue viability of the “manifest disregard” standard, hopefully SCOTUS will find an opportunity to address the question.

Other SCOTUS activity

The Court heard arguments over the last three weeks in four arbitration cases, which addressed issues of the scope of the FAA’s “interstate commerce worker” exception, California’s PAGA statute, foreign arbitrations as international “tribunals” for purposes of discovery under 28 U.S.C. § 1782, and state-law imposed prejudice as a condition of waiver only in arbitration cases.  There is commentary on those cases in Arbitration News, jdsupra.com; Alternatives to the High Cost of Litigation, @altnewsletter on Twitter: Securities Arbitration Alert, @SecArbAlert on Twitter; George Friedman’s always helpful blog, @GFriedmanADR on Twitter; and in the ever-useful SCOTUS Blog, SCOTUSBLOG.com.  They are all worth your attention.

Legislative Activity

On March 18^th, the House passed HR 963, dubbed the Forced Arbitration Injustice Act (FAIR), which prohibits mandatory predispute arbitration agreements in most employment, consumer, anti-trust and civil rights cases.  The White House has announced that it supports the bill.  A companion bill, S 505, with sponsorship from forty Senators, is still pending in the other house. Passage in the Senate is unlikely, particularly in light of filibuster rules and anticipated Republican opposition.

Literature

Thomas Telesca, Elizabeth Sy, and Briana Enck have an interesting article in the Winter 2022 edition of the Franchise Law Journal, the academic publication of the ABA’s Forum on Franchising, regarding an arbitrator’s obligation to follow substantive law, “Must Arbitrators Follow the Law?,” 41 Franchise Law Journal 347 (Winter, 2022), which is also available on Lexis. They propose solutions to reduce the risk of an arbitrator “bas[ing] his or her decision on an individual perception of what is ‘right’ or ‘fair,’” where “the outcome might run contrary to precedent.”  Their recommendations include a choice of laws provision, “choosing the right arbitrator at the outset,” and requiring a reasoned award.  Regardless of whether you agree or disagree with the authors’ conclusions, you should read the article.  It is a well-researched and very thoughtful piece, loaded with citations.

Have a good weekend.  In order to balance preparation time for this blog (and the frequent paucity of material) with the benefits of a regular publication schedule, I’m going to move from an aspirational three days a week to a more solid (I hope) schedule of publication on Tuesdays and Fridays.  So, see you next week.

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com

[1] “When I use a word, it means just what I choose it to mean — neither more nor less,” Humpty Dumpty, Carroll, Through the Looking Glass.