Federal Jurisdiction
Good news! The U.S. Supreme Court adopted a narrow view of federal jurisdiction in Badgerow v. Walters, issued March 31, 2022. The issue was federal jurisdiction for arbitration. Circuit courts were split on whether the same jurisdictional standard applies to compel arbitration and to enforce or vacate an award.
Jurisdiction and Arbitration
The Court narrowed the jurisdiction of the federal courts to confirm, vacate or modify arbitration awards under the FAA. Section 4 of the FAA provides that a party “may petition any United States district court which, save for such agreement, would have jurisdiction under title 28” to compel arbitration. Sections 9, 10 and 11 allow a federal court “in and for the district within which such award was made” to confirm an arbitration award, or to vacate or modify an arbitration award.
In Hall Street Assoc. v. Mattel, Inc., the Supreme Court held that the FAA does not itself establish federal subject matter jurisdiction. The petitioner must identify an “independent jurisdictional basis” for the relief requested under the FAA. In Vaden v. Discover Bank, the Court held that federal jurisdiction over a motion to compel arbitration under Section 4 can be established by “looking through” the petition to determine whether the underlying arbitration involves diversity of citizenship or a federal question, even though the underlying matter is not before the Court.
“Look-Through”
In Badgerow v. Walters, the Court held that “look-through” federal question jurisdiction is not available under Sections 9, 10 or 11 of the FAA. Badgerow requires a state court action to confirm, vacate or modify an arbitration award unless the petition shows (1) complete diversity of citizenship between the parties and at least $75,000 in dispute; or (2) the action to confirm, vacate or modify the arbitration award itself raises a question of federal law. Neither the FAA nor the issues in the underlying arbitration will be sufficient to satisfy (2). In fact, the Badgerow Court does not identify any federal claims that would satisfy (2).
“Rather, the application concerns the contractual rights provided in the arbitration agreement, generally governed by state law. And adjudication of such state-law contractual rights—as this Court has held in addressing non-arbitration settlement of such state-law contractual rights—typically belongs in state courts.”
The federal courts may only exercise jurisdiction if there is an independent basis for federal jurisdiction in the petition. The FAA provides two distinct standards for federal jurisdiction. A more liberal standard for petitions to compel arbitration. A more restrictive standard for petitions for review of an award. The petition must include an express basis for federal jurisdiction.
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