The U.S. Supreme Court has ruled that, unlike petitions to compel arbitration, petitions to confirm or vacate an arbitration award cannot be brought in federal court simply because the underlying dispute involves a federal question.  The Supreme Court’s 8-1 decision in Badgerow v. Walters, 2022 WL 959675 (U.S. March 31, 2022), resolves an issue over which the federal courts of appeals were split.  As a practical matter, it means that, going forward, motions for confirm or vacate arbitration awards will now be able to be brought in federal court—rather than in state court—only if there is diversity of citizenship between the parties to the dispute or the application itself (as opposed to the underlying dispute) involves a federal question.  The decision also marks a triumph of the “textualist” approach to statutory interpretation, even among members of the Court’s so-called “liberal” wing, as opposed to a more policy-oriented approach.

The Supreme Court addressed the issue of federal jurisdiction over motions to compel arbitration under Section 4 of the Federal Arbitration Act (“FAA”) more than a decade ago in Vaden v. Discover Bank, 556 U.S. 49 (2009).  In that case, the Court rejected the standard articulation of the well-pleaded complaint rule ordinarily used to analyze federal jurisdiction, under which courts would look to the face of the federal court petition for a basis for federal jurisdiction. Instead, the Court adopted the so-called “look through” approach. Under this approach, “[a] federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law.” Id. at 62. Thus, whereas the well-pleaded complaint rule would require that the Section 4 motion to compel itself evinces a federal cause of action, under Vaden, courts examine the underlying dispute potentially subject to arbitration to determine whether that dispute presents a federal question.

In reaching this result in Vaden, the Court relied in part on the language of Section 4, which states that a proponent of arbitration may seek an order compelling arbitration in “any United States district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” (Emphasis added.)  The Court also held that the look-through approach was consistent with basic jurisdictional tenets and practical considerations, because failure to look through to the arbitration proceeding’s subject matter “would permit a federal court to entertain a § 4 petition only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract.” Id. at 65. Such an “approach would not accommodate a § 4 petitioner who could file a federal-question suit in (or remove such a suit to) federal court, but who has not done so.” Id.

Subsequent to Vaden, the federal courts of appeals have been split over whether to apply the same “look through” approach to applications to confirm or vacate an arbitration award pursuant to Sections 9 and 10 of the FAA.  The 1st, 2nd, 4th, and 5th Circuits ruled that federal courts can apply the “look through” approach to such applications, see Quezada v. Bechtel OG & C Constr. Servs., 946 F.3d 837 (5th Cir. 2020); McCormick v. Am. Online, Inc., 909 F.3d 677 (4th Cir. 2018); Ortiz-Espinosa v. BBVA Secs. of Puerto Rico, Inc., 852 F.3d 36 (1st Cir. 2017); and Doscher v. Sea Port Group Secs., LLC, 832 F.3d 372 (2d Cir. 2016), while the 3rd and 7th Circuits ruled that the “look through” approach does not apply to such applications, and that there must instead be a basis for federal jurisdiction—such as diversity of citizenship—on the face of the complaint. See Goldman v. Citigroup Global Markets, Inc., 834 F.3d 242 (3d Cir. 2016); Magruder v. Fid. Brokerage Services LLC, 818 F.3d 285 (7th Cir. 2016).

The issue arose in Badgerow because, in the underlying dispute, the plaintiff, Denise Badgerow, brought employment-related claims against her employer under both state and federal law.  The arbitrator sided with the employer, dismissing Badgerow’s claims.  Badgerow then sued the employer in Louisiana state court to vacate the arbitral decision based on alleged fraud.  The employer responded by removing the case to the federal district court in Louisiana and, once there, applied to confirm the award.  Badgerow moved to remand the case to state court, arguing that the federal court lacked jurisdiction over the case.  The district court assessed its jurisdiction under the “look through” approach of Vaden and found that it did have jurisdiction under that approach, and then confirmed, denied Badgerow’s application to vacate, the arbitral award.  The Fifth Circuit affirmed the district court’s finding of jurisdiction, relying on Quezada, which it had just issued.

The Supreme Court reversed and rejected the “look through” approach that the 1st, 2nd, 4th, and 5th Circuits had applied in connection with applications for confirm or vacate awards under Section 9 and 10 of the FAA, ruling that this approach was contrary to the statutory text.

The Court noted that, under Section 4 of the FAA—which governs application to compel arbitration—that statute provides that a party to an arbitration agreement may petition for an order to compel arbitration in a “United States district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties.”  (Emphasis added.)  The Court quoted Vaden as saying that it was that text that “drives our conclusion that a federal court should determine its jurisdiction by ‘looking through’ a §4 petition to the underlying substantive controversy”—to see, for example, if that dispute “‘arises under’ federal law.”  556 U. S., at 62.

In contrast, the Court noted, Section 8 and 9 of the FAA—the provisions concerning petitions to confirm or vacate awards—“contain none of the statutory language on which Vaden relied.  Most notably, those provisions do not have Section 4’s ‘save for’ clause.  They do not instruct a court to imagine a world without an arbitration agreement, and to ask whether it would then have jurisdiction over the parties’ dispute.  Indeed, Sections 9 and 10 do not mention the court’s subject-matter jurisdiction at all.”  2022 WL 959675, at *2.

Accordingly, the Court ruled, “under ordinary principles of statutory construction, the look-through method for assessing jurisdiction should not apply. . . .  We have no warrant to redline the FAA, importing Section 4’s consequential language into provisions containing nothing like it. Congress could have replicated Section 4’s look through instruction in Sections 9 and 10. Or for that matter, it could have drafted a global look-through provision, applying the approach throughout the FAA. But Congress did neither. And its decision governs.”  Id. at *5.

Justice Elana Kagan authored the Court’s decision, which further demonstrates the truth of her famous remark a few years ago in a lecture in honor of former Justice Antonin Scalia that “we’re all textualists now,” in a nod to Justice Scalia’s influence in that regard.  The only dissenter from Justice Kagan’s opinion was Justice Stephen Breyer, a mainstay of the Court’s “liberal” wing who has announced his retirement when the Court takes its summer recess.  In his dissent, Justice Breyer, wrote that, when interpreting a statute, “it is often helpful to consider not simply the statute’s literal words, but also the statute’s purposes and the likely consequences of our interpretation.”  Id. at *9.  He went on the discuss certain policy concerns that he believed counseled in favor of the “look through” approach, including consistency with the interpretation of Section 4.  Justice Kagan’s majority opinion disagreed with those policy concerns, but ruled that, in any event, “[e]ven the most formidable policy arguments cannot overcome a clear statutory directive.”  Id. at *8.

As a practical matter, the Court’s decision means that, going forward, applications for confirm or vacate arbitration awards can be brought in federal—rather than state—court only when there is diversity of citizenship between the parties—that is, the plaintiff and defendant are residents of different states—or there is some other basis for federal jurisdiction on the face of the complaint, such as admiralty.  The mere fact that the underlying dispute in the arbitration involves a federal claim or question will not be sufficient to establish federal jurisdiction.  Some practitioners believe that state courts tend to be more willing to vacate arbitration awards than federal courts are.  It remains to be seen whether state courts will live up to that reputation as more and more applications to confirm or vacate awards are brought in state courts in the wake of Badgerow.