The Problem of Federal Question Jurisdiction Over FAA Petitions After a Domestic Arbitration

Federal question subject matter jurisdiction is easy to describe:  a party can bring an action in federal court if its claim is based on federal law.  However, the determination of whether such a federal question exists is not very easy when a party is seeking to confirm, modify or vacate a domestic arbitration award in federal court pursuant to the Federal Arbitration Act (“FAA”) §§ 9-11.  Does the “federal question” have to be an element of the petition itself?  Or is it enough that a claim in the underlying arbitration is based on federal law?  The federal circuit courts are split on that issue.  Consequently, in the absence of diversity jurisdiction, and where the New York Convention and FAA § 203 do not apply, the determination of whether a post-arbitration award motion under the FAA will have to be brought in state court or federal court may depend on the jurisdiction in which the motion is to be made.

The Supreme Court has not considered the federal question jurisdiction question with respect to motions or petitions under FAA §§ 9-11.  However, in Vaden v. Discover Bank, 556 U.S. 49 (2009), it clarified the analysis of that issue with respect to a FAA § 4 petition to compel arbitration (i.e., a pre-arbitration petition).  In that context, the Supreme Court ruled that, based on the specific statutory language in Section 4,[1] a federal court must determine whether, assuming the absence of an arbitration agreement, the parties’ underlying claims raised a federal question such that the court would have subject matter jurisdiction.  Vaden, 556 U.S. at 62-64.  In other words, the court has federal question jurisdiction if the hypothetical “suit is one that could be litigated in federal court,” even though those underlying claims are not then actually before the federal court.  Id. at 75 (internal citations and quotations omitted).  This is the “look through” analysis.

In so holding, the Supreme Court specifically rejected the analysis of several lower courts that Section 4 petitions were “essentially a plea for specific performance of an agreement to arbitrate, and . . . thus present[] principally contractual questions” governed by state law.  Id. at 63.

But Vaden did not address post-arbitration petitions pursuant to FAA §§ 9-11, and the circuit split in effect reflects differing views on whether the Vaden analysis applies to those sections of the FAA as well.

The more restrictive approach applied by the Third, Seventh and Ninth Circuits holds that “a federal issue resolved by the arbitrator does not supply subject-matter jurisdiction for review or enforcement of the award,” Magruder v. Fid. Brokerage Servs. LLC, 818 F.3d 285, 288 (7th Cir. 2016) (emphasis in original); see also Goldman v. Citigroup Glob. Mkts., Inc., 834 F.3d 242, 253 (3d Cir. 2016), and that the petition itself must require “the resolution of a substantial question of federal law,”  BofI Fed. Bank v. Golub, No. 18-cv-816-LAB (JMA), 2018 U.S. Dist. LEXIS 192410, at *2 (S.D. Cal. Nov. 8, 2018), quoting Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1112 (9th Cir. 2004).  Generally, these courts do not apply the Vaden holding to post-arbitral petitions because the statutory language of §§ 9-11 does not include the “save for” language, which the Supreme Court identified as “driv[ing] our conclusion that a federal court should determine its jurisdiction by “looking through” the petition to the parties’ underlying substantive controversy.”  Vaden, 556 U.S. at 62.  As a practical matter, this makes federal question jurisdiction over those post domestic arbitration petitions virtually unattainable in those Circuits.  For example, in BofI Fed. Bank, the court rejected petitioner’s argument that “failure to follow federal procedure . . . can give rise to federal question jurisdiction,” and noted that even where there was a manifest disregard of substantive federal law in the underlying arbitration, courts were “reluctant” to exercise jurisdiction.  BofI Fed. Bank, 2018 U.S. Dist. LEXIS 192410 at *4.

The other school of thought, which includes the First, Fourth and Second Circuits, reflects a more generous view concerning the issue, which makes the federal courts more accessible for post-arbitral petitions.  These courts apply the Vaden rule to petitions pursuant to FAA §§ 9-11 despite the difference from FAA § 4 in statutory language.  See, e.g., Ortiz-Espinosa v. BBVA Sec. of P.R., Inc., 852 F.3d 36, 45 (1st Cir. 2017) (applying the look-through analysis and holding that “the mere difference in statutory text between the sections does not itself compel a holding that the sections are to be interpreted differently”).  The rationale in these Circuits is that in “light of the important role intended for the federal courts in enforcing arbitration agreements post-award, it would make no sense to effectively exclude federal question jurisdiction over those cases.”  Id.  Further, this practical approach -- “if the district court would have jurisdiction over a § 4 petition, were one to be filed, it has jurisdiction over § 10 and § 11 motions” as well, McCormick v. Am. Online, Inc., 909 F.3d 677, 682 (4th Cir. 2018); see also Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 386 (2d Cir. 2016) -- makes the FAA process a “comprehensive alternative to litigation.”

Currently, there is no pending certiorari petition seeking to tee this issue up before the Supreme Court, and so it remains to be seen which approach will eventually be approved by the Justices.  In the meantime, parties should be aware of the law in their jurisdiction, as it may have definite implications for whether or not your post domestic arbitration petition ought to be filed in a state or a federal court.

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