I’m Looking Through You — Or Not: Federal Jurisdiction to Enforce Arbitration Awards

Rarely do arbitration issues remind me of a Beatles song, but today’s issue does.  Remember I’m Looking Through You from Rubber Soul?  Well, whether a court will do that or not may change where you decide to enforce or challenge an arbitration award.

Which court?

 As I explained in my book, Arbitrating Patent Disputes, A Practical Guide (ABA), deciding where to enforce or challenge an arbitration award can be a little tricky, depending on the parties and nature of the dispute.  Most commercial disputes involve interstate commerce, so the Federal Arbitration Act (FAA) will govern.  The FAA provides the rules on how to compel arbitration, enforce arbitration awards, and change or vacate them.  See 9 U.S.C. §1, et seq.  Curiously, though, the FAA does not provide  subject matter jurisdiction.  To get your arbitration issue before a federal court you must find a separate basis for federal jurisdiction.   Otherwise, you will enforce your award in state court.  See Vaden v. Discover Bank, 556 U.S. 44, 71 (2009).

Diversity makes it easy

As I mention in the book, if you prefer federal court, you will find a basis for federal jurisdiction for many cases in 28 U.S.C. §1332.  That statute provides “diversity jurisdiction” in cases between citizens of different states where over $75,000 is at issue. As I also mention in my book, if that doesn’t work, you may want to consider enforcing or attacking the award in state court.  You didn’t choose arbitration to spend time and money exploring the depths of complicated questions of federal jurisdiction. 

But let’s spend a few minutes exploring those depths to see what may lurk there.  

Federal question jurisdiction may be harder

Where diversity jurisdiction is not present, parties often rely on federal question jurisdiction under 28 U.SC. § 1331. But the circuits are split on how to do the analysis. Some use a “look through” approach.  Others don’t.  If the courts in your jurisdiction don’t use a look through approach, you’re probably headed for state court if you can’t establish diversity jurisdiction.

Looking through

The basis of look through jurisdiction is 9 U.S.C.§ 4 and the Supreme Court’s decision in Vaden v. Discover Bank, 556 U.S. 44 (2009).  The question for the Vaden court was whether a federal court had jurisdiction to compel arbitration under section 4.  Generally, when considering whether it has jurisdiction, a federal court uses the “well pleaded complaint” approach.  Under that approach, the court looks to the complaint to see if a basis of federal jurisdiction is present.  But that isn’t likely to work well in arbitration, since the FAA doesn’t provide an independent ground for jurisdiction, and that is the statute the petitioner is relying on to compel arbitration. 

Instead, the Vaden court decided it would “look through” the petition to compel arbitration to see if the underlying dispute “arises under” federal law.  After doing that, it found the case was premised on a state law claim and not federal law.  Enforcement would have to take place in state court. Still, the Court established that a look through analysis was to be used.

When the question comes to enforcing or vacating an award, some circuits rely on Vaden toapply a look through analysis.  Thus, the court looks through the petition to enforce or vacate to see if the dispute “arises under” federal law. 

For example, in recently decided Quezada v. Bechtel OG&C Construction Services, Inc., No. 19-20042 (5th Cir, Jan. 14, 2020), the underlying dispute was based on the Americans with Disabilities Act, a federal statute.  The Court looked through the petition and found federal jurisdiction over the underlying dispute and therefore to enforce the award.

Not looking through

But other courts find Vaden’s look through approach applies only to petitions to compel arbitration and not to enforce or vacate an award.    Why not?  Because of the specific language of section 4.  It says a party may petition to compel arbitration in “any United States district court which, save for such agreement, would have jurisdiction under title 28 in a civil action … arising out of the controversy between the parties.” (Emphasis added.).  In other words, the statute requires the court to look through the petition to find jurisdiction. 

But section 9, providing for enforcement of an arbitration award, does not have the “save for such agreement” language of section 4.  Neither does section 10, which provides the rules for vacating an award. Thus, these courts reason, they must return to a well pleaded complaint analysis when determining jurisdiction to enforce or review an award. See Magruder v. Fid. Brokerage Servs. LLC, 818 F.3d 285, 288 (7th Cir. 2016); Goldman v. Citigroup Glob. Mkts., Inc., 834 F.3d 242, 255 (3d Cir. 2016.)

But you should

The courts using a look through approach reject the well pleaded complaint approach for a few reasons.  It makes little sense, they say, to find jurisdiction to enforce an arbitration clause, but not find jurisdiction for a court to enforce or review the award that comes about as a result compelling parties to arbitrate. Also, if the well pleaded complaint rule is applied, there would be very few awards subject to federal review. This would be contrary to the FAA’s clear intent to provide broad jurisdiction of federal courts over arbitration awards.  See Ortiz-Espinosa v. BBVA Securities of Puerto Rico, 852 F.3d 36 (1st Cir. 2017); Doscher v. Sea Port Group Sec., LLC, 832 F.3d 372, 381 (2d Cir. 2016); McCormick v. Am. Online, Inc., 909 F.3d 677, 679 (4th Cir. 2018).

Now what?

So, where does that leave parties seeking to enforce or vacate arbitration awards?  It depends.

If you have a controversy between citizens of different states and over $75,000 at issues – which you very often will in commercial arbitration – you can go to federal court.  

If not, strongly consider using state court.  As  noted, state courts also enforce arbitration awards. 

If you are committed to going to federal court, check your jurisdiction to see if it has look through jurisdiction or not.  If so, see if there is an underlying issue of federal law.  There often is.  But don’t rely on a counterclaim for that.  See Vaden v. Discover Bank, 556 U.S. at 60.   

Recognize, though, that there is a circuit split.  And the Supreme Court is likely to resolve that split one way or the other someday, although nothing is pending now so far as I can find. So, if you ask a court to look through the petition to find jurisdiction, you are taking a risk that the Supreme Court will agree with those courts that rely on the lack of “save for” language in section 4 to apply the well-pleaded complaint rule.  That likely will deprive you of federal jurisdiction.  You may decide to forego the fascinating jurisdictional issues and just go to state court.

I can’t help but note that the FAA is now about 100 years old.  One would think the courts would have dealt with this issue definitively by now.  But they haven’t.  Still, once you know about this issue, you can pretty easily determine your next step in enforcing or attacking an award. 

And, as I mention in my book, in many cases all you need to do it pick up the phone and call your opponent. Given the fairly narrow ground for review of arbitration awards and the relative ease of confirming them, your opponent may well recognize it is time to pay up, saving time and money for all.