See You In State Court: The U.S. Supreme Court Limits Federal Jurisdiction Over Petitions to Confirm and Vacate Arbitral Awards

On March 31, 2022, the United States Supreme Court issued its opinion in Badgerow v. Walters, ruling that federal courts may not “look through” to the underlying dispute to determine whether there is federal jurisdiction over requests to confirm or vacate arbitral awards under Sections 9 and 10 of the Federal Arbitration Act (“FAA”).  This decision establishes that petitions to confirm or vacate arbitral awards will be subject to a different, more traditional jurisdictional analysis⸺and are more likely to be heard in state court⸺than petitions to compel arbitration under Section 4 of the FAA, which instructs federal courts to employ the “look through” approach. See Vaden v. Discover Bank, 556 U.S. 49, 50 (2009).

The Badgerow case arises out of an employment dispute between Denise Badgerow and her employer’s principals. Badgerow’s contract required her to arbitrate employment disputes. After her arbitration claims were dismissed, Badgerow sought to vacate the award in Louisiana state court. Her former employer removed the dispute to federal district court, alleging federal question jurisdiction because Badgerow’s initial action involved federal law claims, and also applied to confirm the award. Badgerow moved to remand the case to state court, arguing that the district court lacked jurisdiction over the two FAA petitions: Badgerow’s petition to vacate the award under Section 10, and her employer’s petition to confirm the award under Section 9.

The Supreme Court has held that the FAA does not itself create jurisdiction for a federal court to hear a petition authorized under the statute. Rather, a federal court must have an “independent jurisdictional basis” to hear and resolve such a request. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).  This means that petitioners must demonstrate that there is federal jurisdiction, whether it be diversity jurisdiction in accordance with 28 U.S.C. §1332(a) or federal question jurisdiction apart from the FAA itself, in order for a federal court to hear a petition brought under the FAA. In Vaden, the Supreme Court ruled that, when faced with a Section 4 petition to compel arbitration, federal courts may “look through” to the underlying dispute to establish federal jurisdiction. This is because the text in Section 4, specifically the “save for” clause, instructs a federal court to exercise jurisdiction if it would have otherwise had jurisdiction over the underlying substantive controversy, “save for” the arbitration agreement. See 9 U.S.C. § 4. The ruling in Vaden was limited to Section 4 petitions to compel and was silent as to claims brought under other sections of the FAA. This, perhaps unsurprisingly, led to a circuit split as to whether the same “look through” analysis could be applied to petitions to confirm or vacate arbitral awards under FAA Sections 9 and 10.

In Badgerow, the district court applied the “look through” analysis from Vaden, arguing that a “principle of uniformity” dictates using the same approach for determining jurisdiction under all sections of the FAA. This analysis resulted in the district court asserting jurisdiction over both petitions at issue. The Fifth Circuit affirmed.

Now, the Supreme Court, in a majority opinion delivered by Justice Kagan, reversed that judgment and resolved the circuit split by confirming that the “look through” analysis was unique to Section 4 of the FAA because that section contains explicit “distinctive language directing a look-through” not found elsewhere in the statute. The “save for” clause, upon which the Court’s decision in Vaden rests, is not present in Sections 9 or 10 and cannot be read into the statutory text. Accordingly, the Court declined to extend application of the “look through” analysis to petitions brought under those sections. Instead, for cases brought under Sections 9 and 10 of the FAA, the basis for exercising federal jurisdiction must be apparent on the face of the application.

In practice, the Supreme Court’s decision creates a different jurisdictional bar for, on the one hand, petitioners seeking to compel arbitration in federal court, and on the other, those seeking to confirm or vacate arbitral awards in federal court. The latter applications are now more likely to be heard in state court, particularly if the requirements of diversity jurisdiction are not satisfied. This is true even if the underlying dispute involves only questions of federal law, and is not impacted by the fact that the legal basis for the petition, the FAA, is a federal statute.

The Supreme Court acknowledged that this result is not necessarily the most practical, and noted that it is not entirely clear whether the FAA’s procedural provisions, including those related to confirming and vacating arbitral awards, even apply in state court. The Court nonetheless concluded that even the best policy arguments do not create a mandate to rewrite the law.  

Moving forward, non-diverse parties seeking to enter into an arbitration agreement should keep in mind the implications of this decision. This includes, among other issues, constructing the arbitration provision to account for the state court that will likely have jurisdiction over any post-arbitration disputes and considering what procedural vehicles will be available to enforce the arbitration agreement or otherwise resolve such post-arbitration disputes.