Supreme Court Reins in Federal Courts’ Ability to Handle Arbitration Disputes

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The Supreme Court reversed the 5th Circuit Court of Appeals by 8-1 on March 31, limiting when federal courts have jurisdiction to confirm or vacate an arbitration award under the Federal Arbitration Act.

The case is Badgerow v. Walters, court file 20-1143. Oral arguments were heard Nov. 2, 2021. The majority decision, joined by seven justices, was written by Justice Elena Kagan. Justice Stephen Breyer was the sole dissenter.

According to Kagan’s opinion (pdf) in the case, petitioner Denise Badgerow was a financial adviser for REJ Properties, a firm run by respondent Greg Walters and two others. Her contract required her to bring any employment claims to arbitration, instead of court. She was fired and launched an arbitration action against the company. Arbitrators ruled for the company.

Badgerow pressed her claim, arguing the arbitration process was tainted by fraud, and sued in state court in Louisiana. Walters had the case removed to federal district court, which confirmed the award in favor of the company, reasoning it had jurisdiction because Badgerow’s employment suit raised federal-law claims.

Badgerow then applied to remand the case back to state court, arguing that the federal court lacked jurisdiction over the parties’ requests under Sections 9 and 10 of the Federal Arbitration Act (FAA), either to vacate or confirm the award. Under Sections 9 and 10, a party may apply to the court to confirm, or alternatively to vacate, an arbitral award. When an appeal came before the 5th Circuit, that court sided with the company.

But federal courts, as the Supreme Court has often held, “may or may not have jurisdiction to decide” a request under the FAA, Kagan wrote. The high court held in Hall Street Associates v. Mattel Inc. (2008) that a federal court must have an “independent jurisdictional basis” to resolve the matter. The following year, the Supreme Court ruled in Vaden v. Discover Bank that Section 4 of the FAA instructs a federal court to “look through” the petition to the “underlying substantive controversy” between the parties—even if that controversy is not before the court.

“If the underlying dispute falls within the court’s jurisdiction—for example, by presenting a federal question—then the court may rule on the petition to compel,” Kagan wrote.

“That is so, regardless whether the petition alone could establish the court’s jurisdiction,” the justice wrote. “The question presented here is whether that same ‘look-through’ approach to jurisdiction applies to requests to confirm or vacate arbitral awards under the FAA’s Sections 9 and 10. We hold it does not.

“Those sections lack Section 4’s distinctive language directing a look-through, on which Vaden rested. Without that statutory instruction, a court may look only to the application actually submitted to it in assessing its jurisdiction.”

It is a “normal” and “sensible” “judicial division of labor” to direct Section 9 and 10 applications “to state, rather than federal, courts when they raise claims between non-diverse parties involving state law.” Even if the claims were raised in the arbitration of a federal-law dispute, that underlying dispute “is not now at issue.”

“Rather, the application concerns the contractual rights provided in the arbitration agreement, generally governed by state law,” and such cases should usually go to state courts. Just because Congress created the Section 4 exception, that does not mean the exception is extended “everywhere,” Kagan wrote.

“Congress chose to respect the capacity of state courts to properly enforce arbitral awards. In our turn, we must respect that evident congressional choice,” she concluded, as the Supreme Court remanded the case to the lower courts “for further proceedings consistent with this opinion.”

In his dissenting opinion, Breyer argued that the majority’s interpretation of the law was creating “unnecessary complexity and confusion.”

“I suggest that by considering not only the text, but context, structure, history, purpose, and common sense, we would read the statute here in a different way,” and allow the law “to work better and more simply for those whom it is meant to serve.”

The considerations here “all favor a uniform look-through approach,” Breyer wrote.

Matthew Vadum

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Matthew Vadum is an award-winning investigative journalist and a recognized expert in left-wing activism.



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