The Courts of Appeals weigh into this issue of “Highlights.” For anyone involved in the financial services industry, there is a particularly relevant Fourth Circuit case on federal jurisdiction over the vacatur of FINRA awards.

Federal Jurisdiction; FINRA; Manifest Disregard

In 2023, FINRA closed approximately 3,000 cases.¹ Friedler v. Stifel, 2024 U.S. App. LEXIS 17677 (4th Cir. July 18, 2024), throws a curve into actions to confirm or vacate FINRA awards. Chief Judge Diaz, writing for himself and Judge Motz, begins his analysis with Badgerow v. Walters, 595 U.S. 1 (2022). In Badgerow, SCOTUS held that “look through” jurisdiction does not apply in actions to confirm or vacate arbitration awards under Sections 9 and 10 of the Federal Arbitration Act.² For proceedings under those sections, SCOTUS drew a distinction between claims raised in the arbitration, which might involve a federal statute, and the arbitration itself, which was “no more than a contractual resolution of the parties’ dispute,” Badgerow at 9. Therefore, Judge Diaz opines, “a party seeking to vacate an arbitration award in federal court ‘must identify a grant of jurisdiction, apart from Section 10 itself, conferring access to a federal forum’ such as diversity or federal question jurisdiction,” quoting Badgerow at 9. Acting sua sponte, the panel finds no such independent jurisdictional basis, vacates the District Court’s judgment, and remands with instructions to dismiss the complaint.

Friedler and the other plaintiffs claimed that their broker mismanaged their accounts in violation of federal securities laws. They premised federal jurisdiction for vacatur purposes on a contention that the FINRA arbitration panel violated federal public policy by “manifestly disregard[ing]” the broker’s obligations under those federal laws. The panel holds that the mere involvement of federal law in the underlying arbitration does not automatically grant federal question jurisdiction over an application to vacate the award. Rather, a federal question must be “substantial,” which, in turn, “depends on the ‘importance of the issue to the federal system as a whole,’” quoting Gunn v. Minton, 568 U.S. 251, 260 (2013). Since, in a manifest disregard case, the court gives only “a superficial review of federal law,” the court holds that “any federal issue posed by the petition isn’t ’substantial,’” citing Grable & Sons Metal Products, Inc. v. Darue Engineering and Manufacturing, 545 U.S. 308 (2005).

Friedler is also a valuable read on the nature of “manifest disregard” as a basis for vacating an award in federal court. In light of SCOTUS’s holding in Hall Street Associates, LLC v. Mattel, 552 U.S. 576 (2008), that the only federal grounds for vacatur are those set forth in the FAA, there is a split in authority over whether “manifest disregard of the law” survives as a ground to set aside an award. The Court here opines that the doctrine is merely “a ‘judicial gloss’ on the FAA’s statutory grounds.” (Internal citation omitted); it is not a separate doctrine. For those seeking to preserve a manifest disregard claim against a Hall Street challenge, Judge Diaz’s opinion is a great source for cases supporting that view.

Judge Wilkinson concurs in a separate opinion with several purposes. First, he uses the opportunity to reassert the proposition that federal courts give great difference to an arbitrator’s judgment. More importantly, he warns that Badgerow, by sending confirmation and vacatur cases to state courts may “undercut a more uniform system of commercial dispute resolution” and calls for reform. “Whether the corrective lies with further Supreme Court guidance or with Congress adopting an amendment adding some semblance of ‘look through’ language to Sections 9 and 10 of the FAA itself is well beyond the capacity of the lower federal courts to say. Doing nothing, however, would be a heavy blow to the purposes of the FAA which has only become more, not less, relevant with the passage of time.” (Internal citation omitted). Finally, Judge Wilkinson throws a little shade at the Bar – “The great concern remains that the litigious nature of the legal profession will come incrementally to shrink the difference between arbitration and full-blown litigation.” In other words, counsel, remember that arbitration is not litigation sitting down.

In light of the volume of FINRA awards, this is a case for every securities lawyer, whether claimant or respondent, to have close at hand. While holding that federal court may not be an available avenue for confirmation or vacatur, it is also a reminder to look to the law in any available state court. It may be more favorable to your client than the Circuit’s substantive law, and Friedler may be your key to open that door.

Quick Circuit Court Hits

ICSID and Section 1782

Applying the standards set forth by SCOTUS in ZF Automotive US, Inc. v. Luxshare, Ltd., 595 U.S. 619 (2022), Webuild S.P.A. v. WSP USA, Inc., 2024 U.S. App. LEXIS 17811 (2nd Cir. July 19, 2024)(per curiam by Judges Kearse, Calabresi, and Nathan), holds that an arbitration before the International Centre for the Settlement of Investment Disputes (ICSID) is not a proceeding before a “foreign or international tribunal” for purposes of U.S.-based discovery under 28 U.S.C. § 1782.

Transportation Worker Exception to the FAA

Applying Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022), the Ninth Circuit holds that a technician who refuels planes carrying goods in interstate or foreign commerce is a “transportation worker” for purposes of Section 1 of the FAA, Lopez v. Aircraft Service International, Inc., 2024 U.S. App. LEXIS 17784 (9th Cir. July 19, 2024)(Rawlinson, J., for herself and Judges Melloy, sitting by designation, and Thomas). Although a plane refueler does not have “hands-on contact” with the goods, he or she “play[s] a direct and necessary role in the free flow of goods across borders.” (Brackets in opinion; internal citation omitted). Therefore, a federal court may not compel arbitration of his or her claims.

The holding raises an interesting question (at least to a lawyer) – how far does the exception extend? Is the gate agent who checks my ticket a “transportation worker?” I certainly can’t board the plane without his or her intervention, but the agent is physically removed from the plane itself. Is the agent who goes on board and hands the manifest to the pilot in a different status from those who merely attend to passengers at the gate’s podium? What about the person who pushes the wheelchair through the airport for a passenger who cannot move unaided? While that assistance plays a “direct and necessary role” for that passenger’s “free flow,” it is a role which is irrelevant to the overwhelming majority of passengers. What would have been the status of the baggage handler who used to check bags at the curb? Like baggage handlers on the ramp, he or she connected the bags to the plane, but certainly was not “necessary;” the passenger still had the option of checking bags at the ticket counter. How about the Delta employee in Atlanta who schedules planes arriving at gates in San Diego? If I’m on that plane, I sure hope he or she is “necessary,” but doesn’t that extend the exception beyond any comparison to the seamen and railroad workers who are also outside the scope of Section 1 of the FAA? The professor’s Socratic mind boggles.

Enjoy the rest of your week. I have a friend who mourns the “end of summer” every Fourth of July. But, as August begins, her lament becomes more relevant.

David Reif, FCIArb
Reif ADR
Dreif@reifadr.com

^1. FINRA, “Historical Statistics for Cases Filed and Closed,” Dispute Resolution Statistics | FINRA.org. Includes all closed cases, not only those that went to an award.^↩

^2. “Look through” jurisdiction, which applies to actions to compel arbitration under Section 4 of the FAA, premises federal jurisdiction on the nature of the claim in the arbitration; if that claim raises a federal question, the District Court has “federal question” subject matter jurisdiction.^↩