To Arbitrate or Not to Arbitrate? “Where?” is the Question

Last month, the U.S. Supreme Court provided very helpful instruction on how to enforce arbitration agreements under the Federal Arbitration Act. Short answer: most of the time, arbitrations will get enforced in state court, not in federal court. In deciding that question, the Court reminds us that federal court jurisdiction is limited. If Congress hasn’t made an issue subject to federal court review, most of the time you can’t go to those courts to solve your problem.

Badgerow v. Walters began with an employment dispute. Badgerow said Walters unlawfully fired her in violation of both federal and Louisiana law. Walters denied the accusation. Their employment contract required the dispute to be decided by arbitration where Walters won. Badgerow claimed, though, that there was fraud in the arbitration and challenged the ruling in Louisiana state court. Walters then removed the case to federal district court.

That court ruled that it had jurisdiction, under the FAA, to decide Badgerow’s challenge. The district court went on to conclude there was no fraud. On appeal, the U.S. Court of Appeals for the Fifth Circuit agreed all around. Walters, no doubt, celebrated his victory.

“Not so fast,” said the Supreme Court.

The Federal Arbitration Act does not, by itself, create jurisdiction for the federal courts to hear disputes that stem from arbitration. It does, though, carve out a process to give the federal courts the ability to compel an arbitration.

Section 4 of the FAA says that, “save for” the arbitration agreement, if the federal court would have had jurisdiction to hear the parties’ dispute, then the federal court also has jurisdiction to force the parties to go to arbitration. This process – where the federal court examines what’s behind the parties’ dispute – is called a Section 4 Look Through.

The federal court “looks through” the complaint to enforce arbitration and examines, instead, the underlying dispute between the parties. If, after the Look Through, the federal court concludes a federal question is at stake, then under Section 4 of the FAA, the federal court can compel arbitration.

The Section 4 Look Through is a pretty handy tool. It allows people who want to arbitrate to go to federal court to force the arbitration to happen.

That’s pretty good stuff as far as it goes. But what about the situation that Badgerow and Walters found themselves in?  They weren’t trying to force an arbitration to happen. Badgerow, instead, wanted to set an arbitration aside.  Walters wanted the arbitration award confirmed. You can get that kind of relief under the FAA.  But not under Section 4.

If you want to confirm an award, you proceed under Section 9 of the FAA. If you want to set aside an award, you proceed under Section 10.

So what, you say? Who cares if it’s Section 4 or Section 9 or Section 10? Well, there’s a little problem with Section 9 and Section 10. (This is the part where Walters recorks his champagne and Badgerow tries to stifle a grin.)

Section 4 has a Look Through provision that gives federal courts jurisdiction to compel an arbitration.  Sections 9 and 10? Not so much.

No “Look Through” means no separate hook for federal jurisdiction. Walters is out of luck.  Since Sections 9 and 10 don’t have a Look Through provision, and the FAA doesn’t provide, generally, its own separate federal jurisdiction hook, there is no federal subject matter jurisdiction under the FAA to hear requests to confirm or set aside arbitration awards.

But this result is going to be a mess, right? Section 4 requests to compel arbitration can go to federal court, but Sections 9 and 10 requests to confirm or set aside arbitration awards can’t? Who would’ve created such a convoluted system? That would be the U.S. Congress.

Justice Kagan, writing for an 8-1 majority, makes clear that the Supreme Court, much less the lower federal courts, does not have the ability to edit the laws that Congress drafts to make them easier to implement. They especially cannot edit them to expand the federal courts’ jurisdiction. That the result is a little bit of a patchwork of rules, instead of an easy to apply uniform rule, isn’t the Court’s problem to solve.

What this means for practitioners is that federal courts don’t have independent “subject matter” jurisdiction to resolve most arbitration disputes that arise after the arbitration is complete. In some cases, federal courts will have that jurisdiction. For example, if the parties to the arbitration are from different states and the amount at stake exceeds $75,000 (i.e., diversity jurisdiction).

But most of the time, disputes about enforcing, or setting aside, an arbitration under the Federal Arbitration Act are going to get decided by state courts. That result may seem a little counter-intuitive. But it stems from the Supreme Court’s strict adherence to jurisdictional boundaries.

That’s an important lesson for people with an arbitration dispute. It’s a pretty important lesson for people with any kind of dispute.