Supreme Court Narrows Subject Matter Jurisdiction in Arbitration

On March 31, 2022, the United States Supreme Court issued an important decision regarding federal courts’ subject matter jurisdiction to confirm, vacate, or modify arbitral awards under Sections 9 and 10 of the Federal Arbitration Act (“FAA”). The issue was whether, in such proceedings, courts can use a “look-through” analysis to establish federal court jurisdiction. In other words, (1) can courts look to the underlying basis of the parties’ dispute and; (2) if that dispute gives rise to subject matter jurisdiction, does a petition to confirm, vacate, or modify an arbitral award based on that dispute properly sit in federal court? There was a circuit split on this issue. The Fifth Circuit had previously held that the answer was yes. In its recent decision, the Supreme Court overruled that precedent and held that courts cannot use the look-through test to establish subject matter jurisdiction over petitions to confirm, vacate, or modify arbitral awards under the FAA.

In Badgerow v. Walters, the petitioner sought damages in arbitration for violations of, in part, federal labor laws. The petitioner did not prevail. The petitioner brought action to vacate the award in state court, alleging the award had been procured by fraud. The parties were not diverse and no other federal questions were raised in the underlying dispute. The respondent removed the case to federal court and filed a petition to confirm the award. A fight over remand ensued, and the federal district court ultimately determined it had subject matter jurisdiction to hear the dispute. In reaching that determination, the district court employed the look-through test, and determined that because the underlying dispute raised federal questions, there was subject matter jurisdiction over both the underlying dispute and the accompanying dispute over confirmation of the award. The Fifth Circuit affirmed. 

The Supreme Court rejected the district court’s and Fifth Circuit’s use of the look-through test. The reasoning is fairly straightforward: the only time the FAA authorizes the use of this test is in Section 4, which governs proceedings to compel arbitration. The Court reasoned that Congress’s employment of that test in Section 4, and then its omission from Sections 9 and 10, was a clear indication that the legislature did not mean for the look-through test to apply to petitions to confirm, vacate, or modify awards. Therefore, petitions to confirm, vacate, or modify arbitral awards must satisfy subject matter jurisdiction of its own accord, and the underlying dispute will not provide that jurisdiction. 

Confirming or Challenging Awards Moving Forward

The FAA does not itself confer subject matter jurisdiction, and it is unlikely federal questions would arise in confirmation proceedings. This means that the only likely basis for jurisdiction to confirm or vacate awards in federal court is to have diversity jurisdiction – where the parties are diverse and the amount of the arbitration award is greater than $75,000. This also means parties will have to consider state court as a likely venue to confirm such awards. However, there are other options for parties to consider.

In lieu of immediately going to state court to confirm or challenge an arbitration award, the parties could contractually incorporate the Optional Appellate Arbitration Rules from the American Arbitration Association (“Appellate Rules”). The Appellate Rules provide an optional appellate process for arbitrations before the AAA or the AAA’s international wing – the International Centre for Dispute Resolution (“ICDR”). These Appellate rules provide for an appeal to an appellate arbitral panel that would apply a standard of review greater than that allowed under the FAA and the Texas Arbitration Act. The Appellate Rules provide for a review of errors of law that are material and prejudicial, and determinations of fact that are clearly erroneous. The Appellate Rules can be incorporated into the parties’ contract or can be the subject of a post-contract agreement or stipulation. 

When considering alternative dispute resolution procedures in a contract, the parties should consider every aspect of how such dispute resolution will work, including all the way through securing judgment of an award. Otherwise parties risk having their dispute tied up in procedural issues such as the ones in Badgerow. Agreeing to other appellate procedures, or at least having an understanding of the jurisdictional requirements to confirm an award, will ideally mitigate such risk.

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