Justices to parse jurisdictional thicket in arbitration dispute
on Nov 1, 2021 at 7:08 am
Tuesday’s argument in Badgerow v. Walters brings the justices an unusual side of the Federal Arbitration Act. Frequently in recent decades, the justices have faced decisions by lower courts refusing to enforce arbitration agreements for one reason or another, decisions that the Supreme Court almost always has overturned. This case, by contrast, presents a side of the FAA the justices have not seen often: a messy procedural dispute about the jurisdiction of federal courts under the FAA. Specifically, the case asks when, if ever, do federal courts have jurisdiction over efforts to confirm (or vacate) an arbitration award.
The controversy involves a morass of litigation arising out of the employment of Denise Badgerow by a Louisiana financial advising firm formerly operated by respondent Greg Walters and two other individuals. In connection with that employment, as is typical in the securities industry, Badgerow signed an agreement calling for arbitration under rules promulgated by FINRA (the Financial Industry Regulatory Authority – a private organization that regulates securities professionals).
Since the firm fired her in 2016, Badgerow has variously contended that the firm had discriminated against her on the basis of gender and that she was fired in retaliation either for complaining about gender discrimination or for reporting various securities violations by her employer. Badgerow challenged her employer and respondents before the Equal Employment Opportunity Commission (complaining of her employer), in a FINRA arbitration (against the three individuals, but not her employer), and in a lawsuit in federal district court (against her employer, who had not signed the arbitration agreement, but not against the individuals, who had signed it).
After the EEOC, the arbitrator, and the federal court dismissed all of Badgerow’s claims, the employer filed a motion asking the federal court to confirm the award. Before the court acted, Badgerow sued the three individuals in a Louisiana state court asking that court to vacate the award as procured by fraud. When the individuals removed that case to the federal court already considering the motion to confirm the award, the court had to decide whether it had jurisdiction over Badgerow’s motion to vacate the award. When the lower courts decided in favor of federal jurisdiction and refused to vacate the award, Badgerow asked the Supreme Court to consider the jurisdictional question. If that seems a strange approach, notice that if the federal district court didn’t have jurisdiction, then Badgerow would be free to go back to state court and try to persuade that court to vacate the arbitration award against her.
The arguments revolve around the textual difference between Section 4 of the FAA – the provision that authorizes courts to compel arbitration – and Sections 9 through 11 of the FAA – the provisions related to confirmation, vacation, or modification of an award. As it happens, the Supreme Court has said little about Sections 9 through 11, but it has said quite a lot about Section 4, because that provision is implicated in the frequent cases mentioned above, where one party is trying to force the other into arbitration (which is to say, out of the judicial forum).
Section 4 provides that a party can ask for an order compelling arbitration in “any United States district court which, save for such agreement, would have jurisdiction … of a suit arising out of the controversy between the parties.” Relying on that language, the Supreme Court held in Vaden v. Discover Bank that federal courts have jurisdiction over motions to compel arbitration, but only if they would have had jurisdiction over the underlying controversy between the parties. The court held that the FAA (at least in Section 4) does not itself grant jurisdiction, but calls for courts to “look through” the motion to compel arbitration to the underlying dispute, accepting jurisdiction over the motion to compel only if the court would have had jurisdiction over a suit about the underlying controversy. Generally speaking that would be true if the underlying controversy arose under federal law (like the controversy here) or if the opposing parties were “diverse” (from different states).
The provisions that govern motions to confirm, vacate, or modify an arbitration award (Sections 9 through 11) do not include the language on which Vaden relied (about jurisdiction over the underlying controversy). Rather, the provisions say (to use Section 9 as an example) that the party can make an “application … to the United States court in and for the district within which such award was made,” and that the court “must grant” an order confirming the award if it does not vacate or modify it under detailed standards set out in Sections 10 and 11.
Badgerow reasons that the absence of the language held to be a grant of “look-through” jurisdiction in Vaden means that federal courts do not have jurisdiction over disputes under Sections 9 through 11 (like this one). Because disputes about confirming an arbitral award often will not raise federal-law issues – apart from the arbitration-favorable rules in the FAA – that reading would leave much of the litigation about the confirmation or vacation of an arbitral award to state courts.
Walters reads Vaden quite differently, as reflecting a general “look-through” principle pervading the FAA. For Walters, federal courts should be responsible for supervising arbitration of “federal” disputes like this one – which present claims under federal employment discrimination laws – and that should include not only compelling resistant parties to arbitrate up front, but also deciding after the fact whether to confirm the awards those arbitrators issue, all applying the standards that Sections 4 and 10 of the FAA provide.
The practical side of Walters’ argument is powerful. Section 10 includes detailed rules for exactly what it takes to justify vacation of an arbitral award. If Badgerow is correct, those rules rarely will apply except in the case where the parties happen to be from different states (so that federal courts would have diversity jurisdiction). An amicus brief from the U.S. Chamber of Commerce argues powerfully how perverse it would be to provide federal cradle-to-grave supervision of the arbitration process for purely state-law disputes with no federal connection other than the happenstance of diverse citizenship, while disputes involving claims created by federal law are left outside the detailed standards that Section 10 provides for deciding whether to confirm or vacate an award.
Having said that, I expect that some of the justices will find Badgerow’s textual argument compelling. Vaden does rely directly on the language in Section 4 to justify federal jurisdiction to compel arbitration of a federal-law dispute, and there is no similar language in Sections 9 through 11. The court could read the language quoted above (authorizing an application to a federal district court and stating that the court “must grant” relief) as authorizing jurisdiction, but that would not be easy to square with Vaden’s holding that the FAA itself does not grant jurisdiction.
I would not be at all surprised at argument if several of the justices are deeply unsatisfied with both of those positions. The Chamber of Commerce is bold enough to argue that the best answer is that the court just dropped the ball in Vaden, which should have held that the FAA itself grants jurisdiction to federal courts to enforce its provisions. It is not often that the justices reconsider their own statutory interpretations, but if they can’t find their way to an acceptable solution following Vaden, they well might consider that approach.