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September 05, 2016

Making US Arbitration Law Great Again

Dear foreign readers, this is one of those posts about the architecture of American arbitration law that may leave you convinced that the US could make itself great again by shredding the Federal Arbitration Act (FAA) and installing in its place the UNCITRAL Model Law, or at least the Magna Carta. But do read on. This report concerns one of the infamous “circuit splits” — divergent positions among US federal courts of appeals — that may lead to definitive adjudication in the US Supreme Court. And whereas this split derives from opposite positions about what the Supreme Court has said about the FAA in a heretofore rather obscure 2009 case, and the present situation makes for a rather messy polyglot of state court and federal court jurisdiction in FAA cases, the Supremes, with or without a ninth Justice, may find this issue too ripe to resist.

It should be recalled that in US domestic arbitration cases, those not qualifying as international under the New York or Panama Convention, access to the US federal courts for FAA remedies requires an “independent” basis of jurisdiction because the domestic FAA (Chapter One) does not confer jurisdiction on US District Courts but only specifies the relief they have power to grant if criteria for subject matter jurisdiction are satisfied. A question of federal law (“federal question”) is such a criterion, but it must be a question other than one of federal arbitration law. Thus, whether a domestic award should be vacated for manifest disregard of Montana contract law presents no federal question, whilst vacatur for manifest disregard of the US antitrust laws assuredly does. When the FAA action is a non-diverse one between Montana’s two human residents, their FAA issues related to commercial disputes over grazing lands for bison herds that straddle the Montana-Idaho border are cognizable only in the Montana and Idaho state courts, unless for instance the underlying commercial dispute concerns the scope of federal statutory grazing easements in the Wallowa-Whitman National Forest, in which case there is a “federal question” in controversy and this (plus a modest filing fee) unfurls the welcome mat on the federal courthouse veranda.

Now suppose these two herdsmen have an agreement to arbitrate, but one is recalcitrant and files a plenary action in the Montana state court. If the other files a petition in the federal court for an order compelling arbitration under FAA Section 4, what is the basis for federal jurisdiction? Petitioner says the arbitration involves a federal question. Respondent says the federal court petition presents only the question of arbitrability, governed by state contract law, and thus no independent basis for federal jurisdiction exists. Does the federal court “look through” the Section 4 petition to compel arbitration to see if there is a “federal question” presented in the underlying putative arbitrable controversy? This, in essence, was the main question decided by the Supreme Court in Vaden v Discover Bank, 556 US 49 (2009) (alas, the case involved credit cards in Maryland not bison in Montana, but no matter).

“Looking through” to the underlying arbitration to see if, on the merits, it involves a question federal law is indeed the way to go, held the Supreme Court in the  Vaden case. (And only federal claims count, not federal counterclaims or defenses, – a detail US lawyers know very well and foreign lawyers may bypass). And that conclusion, in a case (Vaden) that concerned only federal subject matter jurisdiction over an FAA Section 4 petition to compel arbitration, and contained no intended hint about the outcome if a different FAA application for relief had been made (confirm or vacate an award, enforce an arbitral subpoena, etc.), was held to be “driven by” the particular language of FAA Section 4 that instructs federal courts that they may be asked to grant a petition to compel arbitration if “save for” the arbitration agreement the controversy between the parties would be judicially cognizable in the federal court. (“A party aggrieved… may petition any United States district court which, save for such agreement, would have [subject matter] jurisdiction …in a civil action… arising out of the controversy between the parties…”).

The day had to come – post-Vaden —  when federal courts of appeals would need to confront this “look through” (or not) question in the framework of a party’s quest for federal jurisdiction over an FAA application for relief other than a Section 4  petition to compel arbitration. And indeed two such days did arrive – August 11 and 22, 2016 — in cases decided by the US Second and Third Circuit Courts of Appeals, each addressing whether to “look through” to the underlying arbitrated dispute in search of a “federal question” when the petition before the US district court is one that seeks to set aside the final arbitration award under FAA Section 10. (Doscher v. Sea Port Group Securities, 2016 WL 4245427 (2d Cir. Aug. 11, 2016); Goldman v. Citigroup Global Markets, 2016 WL 4434401 (3d Cir. Aug. 22, 2016)).

The Second Circuit in Doscher held that Vaden‘s reasoning as understood by the court mandates the same “look through” approach to jurisdiction over a Section 10 petition to vacate as was applied in Vaden to a Section 4 petition to compel. And the court’s analysis strongly implies that the same approach would be required no matter what relief is sought under FAA Chapter 1. For the Second Circuit, the main analytical challenge was to reconcile the Vaden case’s statement that its conclusion was “driven by” the “save for the arbitration agreement” language in FAA Section 4 with Vaden‘s assertion that nothing in FAA Chapter 1 purports to enlarge federal jurisdiction (the Court, per Justice Ginsburg, having referred to FAA Chapter 1 as a statute with an “antijurisdictional cast”). If Section 4’s “save for” clause justified a “look through” approach to Section 4 petitions to compel arbitration, but not other FAA Chapter 1 petitions (e.g. to confirm or vacate an award, or to enforce an arbitral subpoena or appoint an arbitrator) then Section 4’s language would have a federal jurisdiction-enlarging consequence relative to other FAA petitions for relief. The position of the Second Circuit in Doscher is that the “look through” expressly endorsed for Section 4 by the Supreme Court in Vaden is by implication the approach to be taken across the board under FAA Chapter 1. This approach also commends itself, per the Second Circuit, because it negates the utility of a familiar arbitration lawyer’s gambit whereby a party seeking to arbitrate first brings a federal court plenary action merely to vest the federal court with jurisdiction, and then moves to compel arbitration and for a stay under FAA Section 3. The gambit triggers a federal arbitration law rule that the district court’s subject matter jurisdiction, once properly vested notwithstanding that the case belonged in arbitration to begin with, endures throughout a stay pending arbitration and on into the post-award stage, such that the subject matter jurisdiction initially established may later be relied on to make applications for FAA remedies during or after the arbitration. Under the Second Circuit’s reasoning, the access advantage until now often gained by such artifice is available to all parties that could have, but for the arbitration clause, proceeded with a jurisdictionally-proper plenary action in the federal district court.

The Third Circuit in Goldman did not adopt this position, and wrote its opinion without reference to the Second Circuit’s decision eleven days earlier. For the Third Circuit, the presence of the “save for the arbitration agreement” language in FAA Section 4, the absence of comparable language in FAA Section 10 (or any other Section in FAA Chapter 1), and the Vaden Court’s statement that its decision was “driven by” the “save for” language in Section 4, combine to support the conclusion that the “look through” approach does not apply to a FAA Section 10 petition to vacate an award.  In the Third Circuit’s view, it is plausible to suppose that the US Congress when it enacted the FAA (in 1925) placed greater emphasis on enforcement of arbitration agreements than on other arbitration-related judicial relief, and for this reason included in Section 4 special language to facilitate access to federal court to compel a recalcitrant party to arbitrate. The Third Circuit panel took note of the fact that its approach was in harmony with that taken by the District of Columbia Circuit in 1999 (ten years before Vaden) and by the Seventh Circuit earlier this year.

Which is the more cogent analysis? The Third Circuit follows a traditional path to statutory construction, noting the presence of important language in Section 4 (“save for…”) that is absent in Section 10 and elsewhere in Chapter One. But the Vaden Court per Justice Ginsburg referred to the “anti jurisdictional cast” of FAA Chapter 1. And the Third Circuit does not come to terms with this phrase. If the “save for” language in Section 4 allows for federal subject matter jurisdiction of Section 4 petitions in circumstances where other FAA petitions must be filed in state court, i.e. when there is an issue of federal law raised in the arbitration by the Claimant, then it would seem that Section 4 does have a “jurisdictional cast” while other Sections in FAA Chapter 1 do not. Reading the “save for” language of Section 4, by implication, into the other Sections of FAA Chapter 1 concerning judicial relief, which is what the Second Circuit has done, leaves the statute’s neutrality on the question of subject matter jurisdiction intact.

Stay tuned, dear readers, for possible certiorari petitions, and perhaps a petition for rehearing en banc in the Third Circuit, where a different three-judge panel in an earlier (but still post-Vaden) case had taken the “look through” view of jurisdiction under FAA Section 10 in what amounted to a dictum. In the Second Circuit, in contrast, we are told in a footnote to the Doscher opinion that it was pre-screened by every judge of the Second Circuit and that not one judge disagreed with it.

And for those of you international arbitrators who remain unconvinced that you have any stake in this arcane American quarrel, consider this: When you sit as an international arbitrator at a US seat, and issue an arbitral subpoena under FAA Section 7, you may wonder, even in the drafting of the subpoena, in what court the subpoena may be enforced if the witness is recalcitrant. FAA Section 7 is another of those Sections that appears to confer remedial powers on US district courts, but evidently does so only upon the condition that subject matter jurisdiction is independently established. (Section 7 states that the US district court for the federal judicial district in which the arbitrators, or a majority of them, are sitting, may compel compliance and sanction non-compliance).  The witness may be a former executive of the Montana-seated corporation appearing before you as the Claimant in an energy dispute against a company from the neighboring Province of Alberta. Does the US district court in Montana lack subject-matter jurisdiction because the motion to compel compliance with the subpoena involves non-diverse citizens of the same State, leaving your subpoena to be enforced, or not, on some unknown timetable and subject to state law rules on appealability, in the Montana state trial court? Or may the federal court in Montana “look through” the jurisdictionally non-diverse petition to enforce the subpoena to the underlying arbitration which is plainly based on an arbitration agreement that “falls under the [New York or Panama] Convention” as per FAA Chapter Two where arbitration issues are expressly declared to be federal questions (“aris[ing] under the laws and treaties of the United States”) for purposes of subject matter jurisdiction?

Do stay tuned, and beware of the wildlife during your Montana holidays and hearings.