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The Role of U.S. Federal Courts in Arbitration

Arbitration is often the preferred, if not contractually required, forum for resolving business disputes. This is primarily because of arbitration’s perceived efficiencies in cost and time-to-resolution as compared to litigation in U.S. state or federal courts. Federal law has embraced arbitration through the Federal Arbitration Act (“FAA”), which, as interpreted by the U.S. Supreme Court, mandates tenforcement of pre-dispute arbitration agreements. This post concerns the U.S. Supreme Court’s recent Badgerow v. Walters ruling implicating the role of federal courts in supervising the arbitration process.

1. When, how, and where can a party seek to arbitrate?

A recurring question from our domestic and international clients is when, how, and where they should seek to invoke and enforce an agreement to arbitrate. The “when to invoke” arbitration question is fairly easy to answer: very early in the dispute to avoid your opponent claiming that you have waived the arbitration provision by conduct (usually litigating in non-arbitral forums). Also fairly easy to answer is the “how to invoke arbitration” issue. When a recalcitrant opponent refuses to comply with a contractually authorized demand to arbitrate (whether that opponent is plaintiff or defendant) the party seeking arbitration files a motion with the relevant court to compel that party to arbitrate.

2. What is the role of  federal courts in supervising the arbitration process at the outset of a dispute?

Where—state or federal court—should a party seeking to compel arbitration file such a motion?

In Vaden v. Discover Bank, the Supreme Court explained that whether a federal court has jurisdiction to hear a motion to compel arbitration depends on “looking through” the arbitration agreement to the facts of the underlying controversy. In other words, it is not enough for the contract simply to say that the parties agree to arbitrate under the auspices of the Federal Arbitration Act.  That is because the FAA does not grant federal courts an independent jurisdictional basis to hear cases involving arbitration clauses. Indeed, doing so would considerably expand federal court jurisdiction.

Rather a federal court must examine the underlying dispute to ascertain whether the facts provide grounds for federal court jurisdiction. Such jurisdiction comes in two flavors: federal question and diversity. The former gives federal courts jurisdiction when a federal law is at issue. The latter gives federal courts jurisdiction when the parties are citizens of different states (or countries) and the amount in controversy exceeds $75,000.

When either ground exists, a federal court may hear and rule on a motion to compel arbitration.  If the court grants the motion, the parties are then compelled to arbitrate the dispute and the arbitrator’s award results in a final adjudication on the merits.

3. What is the role of federal courts in supervising the arbitration process at the latter stages of a dispute?

What supervisory role do federal courts have in the latter stages of arbitration?

That is the high-level question presented in Badgerow v. Walters.  Once the arbitrator issues a ruling, a party may seek to confirm, vacate, or modify an arbitral award in court. Suppose no motion to compel was needed at the outset of the dispute and the parties proceed through an arbitration to an award.  When can a party ask a  federal court to confirm, vacate, or modify the award?

In Badgerow the claimant (plaintiff) lost the arbitration and asked a state court to vacate the arbitration award. The respondent (defendant) removed the case to federal court and asked the court to confirm the award. The underlying dispute involved an employment discrimination claim under Title VII of the Civil Rights Act. A claim the federal court clearly would have jurisdiction over outside the arbitration context and which a federal court clearly would have authority to hear and decide a motion to compel arbitration.

The Supreme Court held that the federal court lacked jurisdiction to decide whether to vacate or confirm the arbitration award.

At first blush this ruling seems inconsistent with Vaden. After all, if a federal court may hear a motion to compel arbitration, why wouldn’t that same court have jurisdiction to decide whether to confirm or vacate that award?

The decision turned on the language of the FAA. Section 4 governs when a party may bring a motion to compel arbitration, while the procedures for confirming or vacating an award are governed by Sections 9 and 10 of the FAA.  The latter sections, explained Justice Kagan writing for the majority, contain none of the statutory language on which Vaden relied. And the court would not “redline” the FAA to import Section 4’s language into the other provisions of the FAA. Congress, she wrote, could have replicated the Section 4 language but it chose not to do so. And finally, Kagan stressed that the “look through” approach to jurisdiction expressed in Vaden is “highly unusual.”

4. Together, Vaden and Badgerow guide federal courts in supervising the arbitration process

Taken together, Vaden and Badgerow describe the contours of federal supervision of the arbitration process, though perhaps in a way that seems counterintuitive. These two cases give parties clear guidance on when, how, and where a party may seek guidance from the federal courts in the arbitration context.

For more on arbitration and domestic and international dispute resolution, see:

Alternative Dispute Resolution: Mediation, Arbitration, and Appraisal

United States Litigation Guide

Will Your U.S. Judgment Be Enforced Abroad?

How to Sue a Chinese Company: The Long Version

China Contract Jurisdiction and Being Too Clever By Half