Circuit Split on Jurisdictional Test for Post-Award Arbitration Petitions

The FAA and the Look- Through Approach

The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–16, facilitates the enforcement of arbitration agreements. Section 4 of the FAA provides that a party may petition “any United States district court which, save for such agreement, would have jurisdiction” for an order compelling arbitration. Based on this language, in Vaden v. Discover Bank, the U.S. Supreme Court concluded that the look-through approach applied to section 4 petitions to compel arbitration.

Sections 9, 10, and 11 of the FAA concern petitions to confirm, vacate, or modify an arbitration award. The Supreme Court has not yet considered whether the look-through approach applies to these post-award disputes.

Dispute over Where to Litigate

After suffering large losses to their brokerage investment accounts, the plaintiffs sought arbitration with the defendants before the Financial Industry Regulatory Authority (FINRA). The plaintiffs alleged that the defendants violated both the Securities Exchange Act, 15 U.S.C. § 78j, and the securities laws of Puerto Rico. But the FINRA panel denied the claims.

The plaintiffs then filed a petition to vacate or modify the arbitration award in the Puerto Rico Court of First Instance. The petition was based on the Puerto Rico Arbitration Act, 32 P.R. Laws Ann. § 3201, not the FAA.

Arguing that the U.S. District Court for the District of Puerto Rico had federal question jurisdiction, the defendants removed the case. Although the plaintiffs moved to remand, the district court agreed with the defendants. It found subject matter jurisdiction based on the look-through approach, determining that the plaintiffs’ claims were actually based on federal securities laws and that it would have had jurisdiction if the plaintiffs filed in district court.

Subsequently, the district court rejected the plaintiffs’ claims and confirmed the arbitration award. The plaintiffs appealed to the First Circuit both the denial of their remand request and the award’s confirmation.

Courts Can Look Through Petitions

The First Circuit concluded that Vaden’s look-through test applies to sections 9, 10, and 11 of the FAA, and that the district court properly exercised jurisdiction over the petition. The Ortiz-Espinosa court acknowledged that the post-award enforcement provisions do not include the same language that the Vaden court relied on. But the First Circuit held that the inclusion of these sections in the statute shows that federal courts have an important role to play in providing post-award review. “And, the look-through approach is the only possible approach that would provide such federal jurisdiction,” the appellate court explained.

The First Circuit emphasized that this would provide for a unitary jurisdictional approach to the FAA. It also stated that the look-through approach would avoid “curious practical consequences,” such as allowing a federal court to compel arbitration but then preventing it from confirming, modifying, or vacating the arbitration award. The Ortiz-Espinosa court also noted that courts reviewing post-arbitration awards may need to resolve issues involving federal law. Turing to the merits, the First Circuit held that the district court did not err in confirming the arbitration award.

Circuits Split over Approach

Like the First Circuit, the U.S. Court of Appeals for the Second Circuit has also adopted the look-through approach for section 10 petitions to vacate arbitration awards. The Doscher v. Sea Port Group Securities court found that applying the same approach to the entire FAA “prevents absurd and illogical discrepancies.”

But the Third, Seventh, and D.C. Circuits disagree. In Magruder v. Fidelity Brokerage Services, the Seventh Circuit explained that once arbitration is over, federal courts do not have “subject- matter jurisdiction to confirm the award or set it aside” just because the claim arose under federal law.

Following the Seventh Circuit’s lead, the Third Circuit held also that “Vaden’s ‘look-through’ basis for jurisdiction” does not apply to section 10 motions to vacate arbitration awards. Citing an earlier Seventh Circuit case, the Goldman v. Citigroup Global Markets court stated that the federal interest emphasized by Congress in the FAA was the enforcement of agreements to arbitrate, not review of arbitration agreements. And in a case that predated Vaden, the D.C. Circuit held that even if the look-through approach is appropriate for section 4 motions to compel arbitration, the “unique jurisdictional language” of that section does not apply to section 10 motions to vacate arbitration awards.

Opposing Viewpoints

“The analyses of the First and Second Circuits are very interesting,” says Mitchell L. Marinello, Chicago, IL, vice chair of the Section of Litigation’s Alternative Dispute Resolution Committee, “and the policy they advance is appealing if you believe that federal courts should have a central role in developing and enforcing the law that applies to arbitration awards that concern issues of federal law.” But “the logic of the First and Second Circuit decisions seems to me to be overly complicated and subtle,” Marinello remarks. In effect, those courts appear to be “using clever analysis to update the FAA,” he says. “The Seventh Circuit’s approach is more straightforward and more consistent with the language of the statute and the way it traditionally has been interpreted,” Marinello believes.

Other Section leaders favor the look-through approach. The approach taken by the First and Second Circuits is “very practical because if it is appropriate to look through a petition to determine if arbitration is proper, it makes sense that you would use the same test at the end of the process,” opines Neal M. Eiseman, New York, NY, chair of the Arbitration Subcommittee of the Section’s Alternative Dispute Resolution Committee. These situations are essentially “the flip side of the coin present in Vaden,” he states. “In other words, it is at the end of the process instead of the beginning.”

Circuit Split May Not Be Resolved Any Time Soon

“Eventually, this issue will get to the Supreme Court,” Marinello predicts. But “probably not until it has been developed more in the circuits. There seem to be many more significant issues for the Court to focus on now.”

Having federal courts take a central role in developing and enforcing the law that applies to the review of arbitration awards—particularly awards that concern issues of federal law—could be important because “some state courts are still unfriendly toward arbitration,” Marinello explains. “A reason to permit federal courts to hear challenges to arbitration awards is to make sure that the FAA’s basic principles are respected. But the FAA does not provide a basis for federal jurisdiction, and the look-through doctrine, as applied to awards, only partly addresses this broader policy question,” Marinello says.

In Eiseman’s view, “ordinarily it does not make a big difference whether motions to vacate or modify arbitration awards are litigated in federal or state court.” He notes that “state courts may apply the FAA, or even if they apply state statutes, the standards are generally not that different than the FAA.” So the First and Second Circuit’s conclusion that federal question jurisdiction exists “typically represents a procedural change—not necessarily a substantive one,” Eiseman observes.

Sara E. Costello is an associate editor for Litigation News.

Keywords: Federal Arbitration Act, FAA, look-through approach, FINRA

Resources

• Federal Arbitration Act, 9 U.S.C. §§ 1–16.
• Ortiz-Espinosa v. BBVA Sec. of P.R., Inc., 2017 U.S. App. LEXIS 1206 (1st Cir. Jan. 20, 2017).
• Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372 (2d Cir. 2016).
• Goldman v. Citigroup Glob. Mkts. Inc., 834 F.3d 242 (3d Cir. 2016).
• Magruder v. Fid. Brokerage Servs. LLC, 818 F.3d 285 (7th Cir. 2016).
• Vaden v. Discover Bank, 556 U.S. 49 (2009).
• Kasap v. Folger Nolan Fleming & Douglas, Inc., 166 F.3d 1243 (D.C. Cir. 1999).
• The Arbitration Award, Remedies, and Post Award Process (webinar), ABA Section of Dispute Resolution (2017).
• Robert Knuts, “Federal Arbitration Act Reigns Supreme,” Alternative Dispute Resolution Committee (Mar. 27, 2013).

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