In a recent case, the removal of an action from state to federal court based on Chapter Two of the FAA (Section 205) and the New York Convention raised a question that puzzles this writer but evidently did not cause any hesitation for the US Second Circuit Court of Appeals. The question: does such removal confer subject matter jurisdiction on the federal district courts to decide issues having nothing to do with an arbitration agreement or award governed by the New York Convention. Per the Second Circuit, at least by implication, the answer is yes. (Bakoss v. Certain Underwriters at Lloyd’s of London, 2013 WL 238708 (2d Cir. Jan. 23, 2013).
Here the complaint filed in state court involved a dispute over disability insurance coverage. Defendant, a Lloyd’s underwriting syndicate, raised two defenses: (1) that the contested issue of whether plaintiff was permanently disabled was arbitrable, and (2) that plaintiff’s notice of claim was untimely. Upon removal, the Lloyd’s syndicate moved for summary judgment on the untimely notice issue, and in the alternative to compel arbitration on whether plaintiff was permanently disabled.
The District Court found that removal was proper based on the arbitration clause in the contract, then proceeded to grant summary judgment for defendant on the timeliness issue that neither party contended was arbitrable. The motion to compel arbitration was dismissed as moot. The Second Circuit affirmed, and the only issue discussed by the Court was whether state law or federal common law applied to decide whether the contractual process for having an independent physician decide whether plaintiff was disabled was “arbitration” under the FAA. The Court held that federal common law applies.
Evidently plaintiff did not raise the question of whether the Court had jurisdiction to decide the non-arbitrable issue of timeliness. Congress presumably intended FAA Section 205 to provide for removal so that questions involving the interpretation and application of the New York Convention could be decided by a federal court, but whether Congress assume that principles of pendent jurisdiction would operate in a removed Convention case as they do in a case removed based on a different federal question is more uncertain. Congress used broad language in Section 205 : “Whenever the subject matter ….relates to an arbitration agreement or award falling under the Convention…” But it seems a doubtful reading of FAA Chapter Two to say that judicial power in a removed case has broader scope than in a case originally filed in federal court invoking Chapter Two as the sole source of subject matter jurisdiction – and in such a case the only relief a Court could grant is the relief expressly provided for in the FAA, together with such relief as is permitted by the Court’s inherent powers.
While the Second Circuit has not issued a definitive interpretation of Section 205, other federal courts of appeals have held that removal is proper whenever a defense to the plaintiff’s claim may be based on Chapter Two and the Convention. But that principle does not answer the question of what the federal district court should do with non-Convention defenses asserted side-by-side with Convention defenses. Unlike federal subject matter jurisdiction under, for example, the antitrust or copyright statutes, the grant of federal subject matter jurisdiction under Chapter Two of the FAA is not jurisdiction to adjudicate the merits of any dispute, but only to determine whether an arbitration agreement should be enforced or not, or whether an arbitration award should be enforced or not. If a motion to compel arbitration based on the Convention and Chapter Two is denied, Chapter Two does not confer subject matter jurisdiction on the federal district court to adjudicate the merits of the underlying dispute. It seems odd, therefore, that in a case where subject matter jurisdiction is based on Chapter Two, that the court would adjudicate any non-arbitration issues. Pendent jurisdiction principles depend on notions of economy, such that the merits of related causes of action should not need to be divided between federal and state courts. But it seems doubtful that pendent jurisdiction should be extended to the realm of FAA Chapter Two, because the jurisdicition conferred is not to adjudicate the merits of any issue other than arbitrability and award confirmation. It seems consistent with the purpose of Chapter Two that the courts faced with a case like Bakoss should address the arbitration issues first, then remand the state law non-arbitration issues for decision by the state courts.