We all know that federal courts are courts of limited jurisdiction. What does this mean in the context of arbitration? New to March 31st!
Federal courts do not have independent jurisdiction to hear any arbitration dispute – there must be an “independent jurisdictional basis” for the federal court to resolve the matter. To see Hall Street Assocs., LLC v Mattel, Inc., 552 U.S. 576, 582 (2008). For enforcement claims under the Federal Arbitration Act (FAA), 9 USC §4, the federal courts “consider” the underlying claim and determine jurisdiction when the underlying dispute involves a matter federal, such as equal protection. Vaden vs. Discover Bank556 US 49 (2009).
As the Supreme Court recently stated, this rule does not apply to motions to confirm, set aside or vary an arbitral award. Badgerow v. Walters, 596 U.S. ___, ___, 142 S.Ct. 1310, 1314 (2022). Sections 9 and 10 of the FAA, which govern vacancies and variations, lack the “distinctive” language directing courts to address substantive controversy. Identifier.
So what is the difference? A lot, as it turns out. Motions to compel under section 4 of the FAA allow a court to exercise jurisdiction where the parties’ underlying substantive dispute would fall within the court’s jurisdiction. See Vaden, 556 United States to __. Sections 9 and 10 of the FAA do not contain the same wording as section 4. Badger596 U.S. at __, 142 S. Ct. at 1315. This means, as the Supreme Court clarified, that federal courts do not have jurisdiction to hear a motion to confirm or set aside an award. arbitral simply because it involves interstate commerce. Identifier. at 1314. There must be an independent ground for federal jurisdiction because the FAA itself does not support federal jurisdiction. Identifier. at 1315.
Federal jurisdiction comes in two forms: diversity cases – suits between citizens of different states over a threshold (28 USC § 1332(a)); and federal matters cases (28 USC § 1331). The federal question means that federal law (as opposed to state law) “creates the asserted cause of action”. Gunn vs. Minton, 568 U.S. 251, 257 (2013). To request the setting aside of an arbitral award under Article 10, the applicant “must identify a grant of jurisdiction outside of Section 10 itself, conferring “access to a federal forum”. Badger596 U.S. at ___, 142 S. Ct. at 1:15 p.m. (emphasis ours), quoting Vaden556 US at 59. If the plaintiff cannot, the dispute is in state court. Identifier.
If the prima facie arbitral award provides diversity jurisdiction, the federal courts may hear a motion to vacate or confirm. For example, if the parties are citizens of Maryland and New York, with a prize over $75,000, Section 1332(a) grants the court diversity jurisdiction. If the application alleges that federal law (other than Section 1331) grants the court federal jurisdiction, the federal courts may hear a motion to vacate or confirm. The enforceability of an arbitral award is do not a federal matter: it is “nothing more than a contractual resolution of the dispute between the parties – a means of settling legal claims”. Badger596 U.S. to __, 142 S. Ct. to 1317, quoting Vaden556 US at 63. The jurisdiction of transparency cannot, as the Supreme Court reminds us, be drawn “from nowhere”. Identifier. at ___, 142 S. Ct. at 1318.
This means that most arbitration enforcement actions must be brought in state court, not federal court. Practitioners should review the relevant state arbitration law to review the processes and grounds for confirmation, cancellation, and modification.