Marc J. Goldstein Arbitrator & Mediator NYC
October 29, 2012

Deference to Arbitral Jurisdiction Rulings: What If Any Limits?

Add the US Fifth Circuit Court of Appeals to the roster of federal jurisdictions that, like the Second Circuit, hold that when an arbitration agreement adopts rules that empower arbitrators to resolve disputes over the scope of arbitrable issues, the arbitrators’ decision on that matter receives the same very high level of deference as arbitrators’ decisions about the merits of the dispute. (Morgan Keegan & Co. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012).

Here the arbitration was brought by 18 investors in a mutual fund, each of whom had signed a client agreement providing for arbitration under the rules of a securities exchange or organization of which the mutual fund was a member. Based on that provision, claimants opted for FINRA arbitration, and, after the dispute had arisen, signed a written submission agreement for arbitration under FINRA’s Code of Arbitration Procedure (“FINRA Code”).

The FINRA Code provision giving arbitrators power to decide the scope of their jurisdiction is less explicit in this regard than most international arbitration rules. Notably the phrase “jurisdiction” is not present. Instead the FINRA Code provides that arbitrators will “ha[ve] the authority to interpret and determine the applicability of all provisions under the Code,”  and to do so in “final and binding” fashion.

One such FINRA Code provision states that the Code governs arbitrations between a FINRA member firm and a “customer.” The mutual fund contended that claimants’ claims were derivative not individual claims and therefore were not “customer” claims. The arbitration panel rejected this position, but the district court accepted it and vacated the award on the basis that the panel exceeded its powers by deciding non-“customer” claims.

The Fifth Circuit’s rejection of the district court’s approach is so categorical that the reader of this opinion learns nothing about the nature of the argument that the arbitrated claims were “derivative” or the basis for the district court’s conclusion that the panel had committed error. Drawing no distinctions between merits-related and jurisdiction-related fact-finding, the Fifth Circuit simply held that the district court had no power to review the panel’s award for error, even serious error.

Are there any meaningful limits to arbitral powers to extend their jurisdiction under such a test? Suppose the arbitrator finds that only one of six claims asserted by the FINRA arbitration claimant is in the capacity of “customer” but decides, citing neither any textual provision of the FINRA Code nor any interpretive guide issued by FINRA, that there is “ancillary jurisdiction” akin to that exercised by courts? At some point, arguably, the textual or contractual basis for the arbitral position on jurisdiction is so attenuated that it becomes, in the words of the Supreme Court in the Stolt-Nielsen case, the arbitrators’ “dispens[ing] their own brand of industrial justice.”

One would have to plumb the depths of the record in this most recent case to know if the panel’s decision was indeed close to or even over that line between “consensual” and “prudential” arbitration.  No purpose would be served by doing so. What seems most important is that the position of the Fifth and Second Circuits will continue to be applauded by some as a vindication of the autonomy of arbitration, and bemoaned by others as a dangerous license for arbitral omnipotence. District courts asked to vacate awards concerning the application of rules of the arbitral forum should remain willing to question seriously whether the arbitrator has merely applied or interpreted a rule, or has in fact extended it beyond the arguable bounds of what may be called interpretation. 





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