The US Supreme Court Limits Federal Courts’ Jurisdiction To Confirm or Vacate Domestic Arbitral Awards Under Sections 9 and 10 of the Federal Arbitration Act, Expanding the Role of State Courts in Arbitration

Factual and Procedural Background

The case stems from an employment dispute between petitioner Denise Badgerow and her former employer, REJ Properties, a firm run partly by respondent Greg Walters. After being terminated from her role as a financial advisor, Badgerow initiated arbitration against Walters with the Financial Industry Regulatory Authority (FINRA), claiming that her termination was unlawful. But the FINRA arbitrators dismissed her claims. 

Badgerow then moved to vacate that award in a Louisiana state court. Walters removed the case to the United States District Court for the Eastern District of Louisiana, asking the federal court to confirm the award. In response, Badgerow moved to remand the case to state court, arguing that the federal court lacked independent jurisdiction to resolve the parties’ respective requests under Sections 9 and 10 of the FAA.

The district court rejected Badgerow’s arguments. It denied her request to remand the case to state court and then ruled on the underlying dispute, confirming the award against her. In the court’s view, jurisdiction was proper based on the test articulated in Vaden v. Discover Bank, 556 US 49 (2009). In Vaden, the Court determined that federal courts may exercise jurisdiction over an application to compel arbitration (under Section 4 of the FAA) when the parties’ underlying substantive dispute would have fallen within the federal court’s jurisdiction. The district court applied Vaden to Walter and Badgerow’s competing motions under Sections 9 and 10, reasoning that the same logic should apply: The underlying dispute involved Title VII employment claims, thus providing a federal question to create independent subject matter jurisdiction. Accordingly, the district court found that it had jurisdiction. The US Court of Appeals for the Fifth Circuit affirmed, agreeing that Vaden’s look-through approach to motions to compel arbitration under Section 4 should also apply to motions to confirm or vacate awards under Sections 9 and 10.

The Supreme Court’s Decision

The US Supreme Court granted certiorari to resolve a split among the circuits about whether the “look-through” approach to compel arbitration adopted by Vaden should also apply to actions to confirm or vacate arbitral awards.

In an 8-1 decision by Justice Elena Kagan, the Court reversed the Fifth Circuit and determined that Vaden’s look-through test does not apply: federal courts cannot search an underlying arbitration dispute for a federal question that would establish jurisdiction to confirm or deny an arbitral award under Sections 9 and 10 of the FAA.

Rather, a federal court may only entertain an action to confirm or vacate an arbitral award if an independent jurisdictional basis beyond Section 9 or 10 would otherwise allow the federal court to hear the case.

Justice Kagan emphasized that Sections 9 and 10 of the FAA “contain none of the statutory languages on which Vaden relied” in interpreting Section 4. “So under ordinary principles of statutory construction, the look-through method should not apply.” The Court stated that “[W]hen Congress includes particular language in one section of a statute but omits it in another section of the same Act,” the court will “generally take the choice to be deliberate.”

District courts can only consider the petition to confirm or vacate to assess its jurisdiction without the look-through approach. This means that even if the underlying arbitration involved issues of federal law – like Badgerow’s Title VII claims – those claims are no longer relevant at the point of confirmation or vacatur. “Rather, the application concerns the contractual rights provided in the arbitration agreement, generally governed by state law,” the Court reasoned. “And adjudication of such state-law contractual rights … typically belongs in state courts.”

Justice Stephen Breyer, who will retire from the Court at the end of the Term, was the sole dissenting opinion. In his dissent, Justice Breyer argued that the majority has created “unnecessary complexity and confusion” by adopting different jurisdictional standards for different sections of the FAA. Instead, he would prefer a “uniform look-through approach” that would apply the same test to the entire statutory framework.

Our Comment

Badgerow will make it more difficult for federal courts to hear actions to confirm or vacate arbitral awards without an independent jurisdictional basis. It will simultaneously make such filings more common in state courts. 

Importantly, this decision is unlikely to affect actions to confirm or vacate international arbitral awards. Parties to international arbitrations generally have an independent basis to gain entry into federal court: the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. Chapter 2 of the FAA explicitly implements the New York Convention and provides for federal court jurisdiction. Section 203 of the FAA states: “An action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States. The district courts of the United States … shall have original jurisdiction over such an action or proceeding, regardless of the amount in controversy.” The independent statutory basis for federal jurisdiction over international arbitration disputes in Chapter 2 of the FAA (and deriving from the Senate-ratified New York Convention) was not at issue in Badgerow.

While there are still other roads to get into federal court, the Supreme Court has made it clear that the FAA itself does not create independent federal subject matter jurisdiction for actions to confirm or vacate awards.